Devon Energy Stock

Welcome to Devon Energy's Second Quarter 2026 Conference Call. [Operator Instructions] This call is being recorded. After today's prepared remarks, we will host a question-and-answer session.

I'd now like to turn the call over to Mr. Dan Guffey. Dan, you may begin.

Good morning, and 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 statements 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.

Also, please note Devon's second quarter results reflect legacy Devon operations for the full quarter plus Coterra beginning on May 7.

With that, I'll turn the call over to Clay.

Thank you, Dan, and good morning, everyone. This morning, I am excited to discuss our strong 2Q 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.

But first, let's turn to Slide 2 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 3 attributes that define Devon. First, everything is anchored around the company's culture of excellence. Second, technology is a genuine competitive advantage. And third, we have key investment differentiators in inventory, cost of supply and financial discipline. You will hear more about these themes throughout today's call.

Now let's turn to Slide 3. The merger closed on May 7, just 94 days after announcement. With both legacy companies having recent integration experience, the combination has gone even better than we planned. I'm 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 time line, I couldn't be more proud. Slide 4 puts those first 100 days on a time line. 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 1 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 2 weeks later, we captured value through our success in the Permian lease sale. By week 5, we had issued combined guidance that was better than the sum of the stand-alone plans. And by week 6, 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 5. 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 2 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 6 and 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 through 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 encourage 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 tracts were completely undeveloped from grass to granite, ensuring that we have the opportunity to optimally and most economically develop the resource.

As 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 and our significant water, gas gathering and electrical infrastructure means lower costs and higher margins on production. We are already filing permits, and 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. But the fact is that this is the last Delaware Basin federal lease sale of this scale.

As 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, and that's displayed on Slide 7.

Our well productivity is top tier and our drilling and completion cost per foot are among the lowest in the basin. In addition, our inventory is the deep -- 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 8 and synergies. We remain firmly on track to deliver at least $1 billion of annual synergy targets by year-end 2027, and our confidence is higher today than the day we announced the deal with more than 350 initiatives now underway across 3 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 margin -- 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 3 together is really technology. I believe technology is the most important competitive advantage for Devon.

So let's turn to Slide 9, 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 frac 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 of surfactant chemistry is enhancing our well recovery. Our first 10 trial wells across 6 different landing zones delivered clear uplift versus offset controls, and we are increasing our tests to more than 50 wells this year.

And 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. The floor is yours.

Thank you, Clay, and good morning, everyone. It's a privilege to be speaking with you on my first earnings call as CFO of Devon Energy. I couldn't be more excited about the future of our company and the opportunities that lie ahead for the company and our owners.

Clay just walked you through the operational story. So let me pick it up on Slide 10 with the scorecard. In summary, during the quarter, we beat guidance on every single measure. Oil production of 503,000 barrels per day came in 1.6% above the midpoint. Total production of 1.36 million barrels of oil equivalent per day reached the top end of guidance. Total operating costs, including GP&T of $8.23 per BOE, were 2% better than the midpoint and capital of $1.3 billion was 2.4% favorable to the midpoint of the guidance as well.

Our strong first half performance gives us increased confidence in our full year outlook and has allowed us to tighten our production guidance ranges for 2026. So what did that performance mean for shareholders?

Turning to Slide 11. In the second quarter, really the last 7 weeks of the second quarter, we returned over $1 billion through a combination of dividends, buybacks and debt reduction. Let me break that down. It starts with the sustainable dividend growth, and we paid a quarterly dividend of $0.32 per share, up 33% from the first quarter. That totals $366 million of dividends paid during the second quarter. By keeping our dividend well within our target range of 10% to 15% of discretionary cash flow, we protect our intention to consistently grow the dividend on an annual cadence.

Next comes the disciplined buyback. We -- with repurchases suspended until the merger closed, we resumed buying quickly after post-closing and retired 4.3 million shares in the last 7 weeks of the quarter. We continue to be active in the market in the third quarter and the remaining $7.8 billion of repurchase authorization will be deployed through a dynamic blend of systematic and opportunistic repurchases going forward. Underpinning it all is the fortress balance sheet, supported by a BBB+ credit rating.

During the quarter, we retired $250 million of senior notes, $250 million of our term loan and completed the Coterra bond exchange. Furthermore, in July, we retired the remaining $750 million of our term loan, which was scheduled to mature during the third quarter. Having completed these actions, I'm pleased to announce that we have met our 2026 debt reduction target through our existing maturities in the quarter.

After delivering these returns and strengthening our Delaware inventory through the New Mexico lease sale, we ended the quarter with a strong liquidity position of $4 billion, including $1 billion of cash on hand. From here, our debt target of approximately $9 billion of total debt by year-end 2027 is achievable, largely with maturities, which occur during 2027. This will position Devon with a leverage ratio at or below 1x through the commodity cycle and will allow us to be opportunistic and countercyclical in our returns program in times of commodity softness.

Looking ahead, Slide 12 shows why the cash flow engine keeps running through the second half on a fully combined basis. On a 20:1 value-adjusted basis, our implied second half capital efficiency is 24% better than our peer average, which puts us among the most efficient producers in the industry. We see that dynamic continuing to improve into the future. That efficiency paired with a disciplined reinvestment rate means the back half of 2026 should generate substantial free cash flow and support a robust shareholder return program. As synergies layer in through 2027, we expect that advantage to strengthen. Importantly, we see the second half of 2026 is at or above the guidance we set just 60 days ago.

That outlook is reflected on our guidance on Slide 13. As I said on the scorecard, our first half gives us increased confidence in the full year plan, including a tightening of the oil range to 495,000 to 505,000 barrels per day, total volumes of roughly 1.4 million barrels of oil equivalent per day and total capital of $4.8 billion to $5 billion. Within that full year, the third quarter steps up meaningfully as our front-loaded capital program turns into production and we record a full quarter of combined results. We expect oil volumes of 550,000 to 560,000 barrels of oil per day during the third quarter, setting up nice momentum heading into the fourth quarter, which I expect to be at similar or higher oil production levels as compared to the third quarter.

We also expect total volumes of 1.66 million to 1.69 million barrels of oil equivalent per day in the third quarter and total capital of $1.4 billion to $1.5 billion, which should be our highest capital quarter of 2026 and simply reflects a full quarter of combined activity and the timing of some capital that shifted from the second quarter. As a result of normal ebbs and flows in the business cadence, we expect capital spending to move down in the fourth quarter, driven by less activity at a number of our business units, including the Marcellus, the Anadarko and the Powder.

We're successfully executing on our 2026 plan and look forward to sharing our initial 2027 views in November. Let me end where Clay began because everything you've heard today ties back to a simple, disciplined model: a premier Permian-anchored portfolio, top-tier capital efficiency, a fortress balance sheet and a return framework that delivers cash to shareholders through the cycle.

With that, I'll turn it to Clay for closing comments before Q&A.

Thanks, Shane. That disciplined model extends to the portfolio itself. Our comprehensive portfolio review is well underway with a single objective: maximizing total shareholder value. It's a top organizational priority, and we're moving with speed and intention to enhance the value of our company by leveraging our differentiated skill set, a hot market for quality assets and keeping an eye on the future value creation opportunities. We are evaluating every asset through a consistent framework of capital efficiency, the scale and durability of free cash flow and strategic fit.

As I've said previously, I expect this exercise to be measured in months, not years, and we're making significant progress with an update expected this fall. That said, I don't think of this as a onetime event. After this initial reset related to the merger, the evolution of our asset base and taking advantage of market opportunities has been a longtime part of Devon's culture and will continue to be a critical skill.

Given the confidence and commercially sensitive nature of this work, as much as I would love to, we will not comment on specific rumors today. But the takeaway is simple. Every asset has to earn its place in the portfolio, and we are working to maximize the short-, mid- and long-term value for our shareholders. When I sum it all up, we believe Devon is a catalyst-rich story. We will deliver quickly against our synergy targets, updating you quarter-by-quarter, making fast progress on our portfolio review and execution, rolling out a capital-efficient 2027 plan, leaning into repurchasing shares and enhancing our advantaged balance sheet. That is a differentiated investment proposition, and this team intends to prove it.

Lastly, I wanted to say thank you to the Devon team. Integration is not easy, but every employee continues to exemplify our core values of integrity, courage, relationships and results. You merged 2 proud companies in record time without missing a beat in the field. This quarter is your proof. To everyone at Devon, the legacy Devon and legacy Coterra alike, thank you. The best is ahead of us.

With that, operator, I'll take our first question. We kindly ask that each caller limit themselves to one question so we can get more questions on the call.

[Operator Instructions] Your first question comes from the line of Arun Jayaram with JPMorgan.

Clay, I will bite my tongue and won't ask you about specific assets or market rumors for assets under your portfolio review. But what I do think will be helpful to the market is you to perhaps provide the criteria that you and the Board and management team are utilizing to identify which assets you view as core to Devon's go-forward portfolio. How does commodity mix between oil, gas, NGLs fit into that as well as tax implications?

Yes. Thanks. And of course, all of that list is on the list and several things as well. When we think about it, I think about it kind of through 3 lenses. First, what's the value of the asset to Devon? How do we think about the inventory? How do we think about our ability to extract value? What's that kind of core base hold position?

And then secondly, you have to be very observant in the market. There's no doubt about it. There are some really interested -- hotly interested parties in buying quality assets, and we don't want to miss any of those opportunities. So the second view is what's the market value of the asset?

And then third, I think it's an important consideration around the strategic fit. How does this asset fit in and enhance what really is a Permian-centric core business? How does it enhance that above and beyond the incredible qualities that we have on our core piece of business? So combine that with the specifics around inventory and capital efficiency and competition for capital, all of those things that you mentioned do play a role in that evaluation.

Your next question comes from Neil Mehta with Goldman Sachs.

Clay, I love your perspective on the federal lease sales. That was very helpful commentary on Slide 6 that kind of walked us through sort of the royalty benefits and maybe why on cost of supply, it's not as high as it optically looked. But how do you think about how you want to approach this acreage? Is this something that gets pulled forward in terms of the timing of how you prosecute it? And maybe spend a little bit more time, if you can, talking about getting the market comfortable with the investment you made here.

Yes. Well, first of all, thanks for the acknowledgment. And what I'll tell you, there's a lot to brag on about the team, but we're not perfect. And I can tell you, we didn't communicate that effectively enough on the rollout. So this is kind of our second attempt. And obviously, there's a whole lot to be proud of on the execution of that. 13 days post close, I was so incredibly excited to get to the finish line and successfully so. We forgot to really kind of nail the communications piece.

So look, we learn every single day. We improve to get -- we intend to get better every single day, and this is a better, more fulsome story. Certainly, that royalty piece, the undrilled nature of this acreage, the mechanics behind this bidding process, unlike some of the Gulf sealed bid processes, just -- it truly exhibits the market price reality. And then it's in our backyard. We're incredibly proud of the operational prowess, the infrastructure that we have, the extended laterals, the footprint that we have, and that's why we are incredibly proud to be the rightful owners of this.

Now that it's in-house, it has to compete like everything else. The good news is, as you can see from the graphic depicted on the slide, it stacks up at the top of the list. This is our Delaware Basin potential depicted on the left side of that slide, Slide 6. And you can see where the red bars line up, and it's very much top quartile, even top decile centric. What that means is we're full speed ahead, getting the permits, getting this in the queue, and we'll be executing, as I mentioned in the prepared remarks, very substantially in the 2027 program.

Our next question comes from Betty Jiang with Barclays.

Congratulations on a strong first combined quarter. My question is on Slide 7 and just on the Delaware well cost. What stood out is that now you're already at $800 per foot, and that is ahead of some of the additional synergies that you're expecting to capture. So if I could ask like where do you see an aspirational target of how that well cost could trend over time? And what you're working on to lower it? What's your confidence level just -- and also just given the suite of technologies that you're seeing out there, how low could that go over time?

Yes. Thanks for the question, Betty. It's a fun topic because there's a lot going on there. I'll hand it over to Blake and get his perspective on this opportunity from a synergy standpoint, but also as a D&C, the D&C executive leading that effort.

Yes. Thanks, Clay. I appreciate the question, Betty, because there's a ton of work that goes into just a number on a slide. If you don't mind, I'll give you a little deeper dive into some of the synergies we're already seeing. You can imagine it's been a ton of work bringing these 2 orgs together, but it's also been really exciting, and we're gaining a lot of momentum. Our teams are finally getting to look under each other's hood, and we've been operating across the lease line from each other for a long time, and it's leading to a lot of great gains.

One of the first things we did is we immediately centralized our D&C team post-merger, and that's already paid a bunch of dividends. The first one I would point to is on the supply chain side. Devon has a fully integrated supply chain team that can bundle or debundle services almost in real time to optimize whatever the current market presents to us. We brought that flexibility to the merger, particularly with our new scale and also with the legacy Coterra operation, which was more of a bundled model, they've been able to find a lot of value there.

The second piece is just sharing best practices and techniques. They like to say there's no secrets in the oil field, but I can tell you every good operator has a few. And our teams have got to share some secrets. Devon figured out a really clever way to make simul-frac more efficient. We've been able to extrapolate that quickly across the whole platform. So you'll see the number of simul-frac wells going up in our program. Whereas on the Coterra side, I spent a lot of time and energy on long laterals, complex wellbores, 4- and 5-mile wells, 4-mile U-turns in the Permian. All that knowledge is being applied, and you'll see our average lateral lengths start going up through time.

And then the last one, which is really exciting, Clay hit on this earlier, is Devon's really invested a lot of time and energy in AI. And for me, this is nowhere more evident than in the D&C. The way I would explain it is Devon builds a best-of-the-best performance curve with a micrometer. Every minute, every day across every rig, every crew, every well, every basin, constantly searching for best of the best performance and benchmarking against it. And these AI tools are just combing these massive data sets looking for the gaps. They highlight the gaps, they elevate the gaps and the team attacks it. It's see a gap, fill a gap, improve performance, reduce cost all day, every day. That's what the teams live and breathe. And it's been really fun to bring that into the Coterra operations that we've now combined.

So these are some of the big synergies we're already realizing. I can tell you only some of this is in that $800 per foot that we put out. That represents wells coming online between now and the end of the year. So you can think of that as a 9- to 12-month trailing cost structure behind those numbers. The synergies I talked about plus many more are not in that number. And as we look ahead to 2027, we're really excited to deliver an even more aggressive cost structure.

Your next question comes from Gabe Daoud with Truist.

Apologies. Your next question actually comes from Neal Dingmann with William Blair.

Clay, what a 100 days it has been for you all, I want to say congrats. Clay, maybe I'll just take another shot. My question is maybe looking at the portfolio review a different way. While I know you certainly don't want to get into the asset specifics, are you able to say, is there any time frame you all are targeting for this process, given certainly the market appears to be highly a seller's market today. There's no doubt about that. And I assume that bids always have a shelf life. So I'm just wondering, is there any sort of time frame around this?

Yes, absolutely. As I mentioned in the prepared remarks, we're exceptionally aware of the market. And I would tell you, every asset has a slightly different market. But one advantage of announcing an across-the-board effort like this is there is no shortage of incoming phone calls. And so every intentional buyer, every JV partner, every bank, everything that you can conceptually think of is certainly coming our way.

And so that -- as you know from the first 100 days and the message here is we're not letting any grass grow under our feet. We are moving aggressively, but also thoroughly. I think the only thing more important than speed is making sure that we're making the right decision, and that is an absolute first priority is doing the right thing first. Secondly, with haste, speed and intentionality and making sure that we're not slowing anything down. So I have a full -- the organization is coming together exceptionally well. The executive team, the alignment there is going exceptionally well. And I feel like I have the full backing of the Board on however we want to move forward. And I can tell you, it's moving forward quite well. We just want to avoid the trap of commenting on rumor du jour. And so we will effectively stop it there.

Your next question comes from Doug Leggate with Wolfe.

Clay or I guess it's probably directed to you, Clay rather than Shane. But when you think about the use of free cash flow, you've laid out the story about the $9 billion of debt and so on. I think you know obviously, where I stand on this. But I'm particularly interested in what you do with the proceeds of any asset sales. Does that go into a formulaic buyback return of cash? Or does asset sale proceeds get treated differently than operating cash flow if and when they come?

Shane, why don't you take a shot?

Yes, I don't mind doing that. Great question, Doug, and really appreciate it. So look, and I'm sure you're referring to this anyway, but that is net proceeds. Obviously, the first call we've got on any proceeds from any asset sales would be to fulfill our obligations to the government and pay the tax bite from that. So that would come off the top.

On the net proceeds, I think the next question we ask ourselves is what cash flow and credit capacity has been pulled out of the system. And therefore, if we're targeting somewhere around $9 billion of debt by year-end 2027, does that target move based on sort of the new complex or complexion of the portfolio going forward? And it may. So we'll figure out what the right sort of next target could be, both in terms of any leverage reduction and/or adding to the balance sheet.

And then I think the third piece, the one that you're -- I think we're highly focused on in terms of formulaic on that is how do buybacks play a piece of that. And I said, look, it's going to be very situational specific. What size asset, what size proceeds, et cetera. And there's an array from -- on the one side of it, you could see this sort of supplementing an opportunistic buyback plan on another size of proceeds, you could see it maybe stacking on to the base dividend for some period of time, 2 quarters, 4 quarters, 6 quarters to buy back or if we're -- if it's a very large proceeds, asset sale, you could see an accelerated buyback program being a part of the mix there. But that's something that is not formulaic at this point. It's something that's subject to conversation with Clay and the team and certainly with the Board in terms of getting alignment on that. But I think that whole suite is available, but it's going to be dependent on what the size of the net proceeds after sort of taking care of the obligations associated with that sale would be.

Yes. Here's what I would just add to it, Doug. I think this is -- obviously, what an incredible opportunity for us to figure out how do we return shareholders the best. Certainly, we've made significant progress with the opportunities near term on paying down debt. We like the way our balance sheet looks. We've got a little bit more work to do, but that will come in time. I don't feel tremendous pressure. This is certainly a question, and I know you have a firm opinion on this. This is a question and a real active debate amongst our best and most informed shareholders, and we get varying opinions.

When I think about kind of a nominal sale and I think about throwing that additional proceeds on to the significant free cash flow that we generate organically as a company, I think about all 3 options, essentially stacking a little bit of cash, paying down additional debt and then more aggressively going back and buying more shares. I think I have to be on the table. As I look at our share price today, I can't help but think about what a compelling buyback opportunity that is. And certainly, as I think about the balance of the year, having checked the debt goal for the year, I think you'll see us differentially move towards buybacks.

I appreciate the answer, fellas. I might not always agree with it, but I appreciate the answer.

Yes. I appreciate that, Doug. And like I said -- respect your opinion. And like I said, this is one that we actively debate. This is an imprecise science, and we got a lot of smart people that offering -- offer different views on this. So thanks for your perspective. Always appreciate it.

Your next question comes from John Freeman with Raymond James.

Clay, you've previously called the $1 billion sort of synergy target is sort of more of the floor and not the ceiling. And in the presentation, you all did a great job of kind of elaborating and providing a lot more detail on all the various initiatives that are underway, how you're using technology. And I'm just trying to get, I guess, a little better understanding of what's sort of embedded in the $1 billion target versus what would potentially serve as upside to things like the surfactant test, the autonomous artificial lift, like are those sort of included in the $1 billion? Is that additional upside? Just any additional color, Clay, you could provide on that?

Yes. John, here's a little bit of color, and I'm trying to guard against getting too far ahead of ourselves. Like these numbers aren't flowing through the financials yet, and that is where the real rubber hits the road. And so before we start accelerating the $1 billion or increasing the $1 billion target, we want to be real cautious about that because I think the most important thing about this $1 billion is not just delivering it, but doing it in a way that's credible and very transparent to the investors. And so we're going to hold back until we start seeing things flow through the financials, which will be coming in the near quarters, before we do any kind of more granular articulation.

Certainly, there is upside to the numbers. The first order is we've got really good experience. We just did a business optimization with $1 billion. The first order of business is you don't shoot for $1 billion to get $1 billion. You shoot for a number that's much higher than that because things look, evaporate in time, the things get pushed. Sometimes it doesn't exactly fall on the right time line. And then sometimes things are significantly better than you thought.

And so we absolutely have that opportunity today. I mentioned 350 different initiatives. We're already in the process of that. Those things are starting to firm up. We've got a lot of confidence. Absolutely, when you add up all of the kind of gross potential, it's a number well north of $1 billion, but we're sticking with $1 billion. And what I would tell you is the degree of confidence that I have today as opposed to, say, 14 months ago when we were kicking off our business optimization on the legacy Devon side, I feel so much more confident today in being able to deliver this number. We've got the right tools. We've got the teams in place. We know and understand how to quantify, how to hold these numbers with integrity and really deliver, I think, an outsized product to the investors, and that's absolutely our intention.

Your next question comes from Josh Silverstein with UBS.

You had mentioned that the initial 2027 views will come out in November on the 3Q call. I'm curious how you're setting up or how you set up a proper development plan and start allocating capital knowing you're going through this asset review process. Are there multiple plans you have underway? Are you outlining this based on a view of oil and gas prices? Will capital shift? I'm just curious how you're trying to put this together now knowing it's just a few months away.

Yes. Thanks for the question, Josh. It's pretty iterative. And I think the advantage of having sophisticated systems that can move quickly is you need to run all the scenarios. And certainly, as we think about asset rationalization and thinking what will life be like without asset X, Y and/or Z. Certainly, running that through a real-world scenario of how is '27 going to shape up is something that we're doing real time.

And so we have an upcoming strategy session with the Board. That's typically the first time we're showing the Board kind of the 5-, 10-year look. And of course, in that is their first kind of detailed view of the coming year. That usually gets us pretty close to being able to telegraph kind of pre-read by November. That was both legacy Coterra and Devon's kind of general best practice. And so we expect to follow up on that. Again, this will be rough numbers. This will be kind of a soft guide as we've done before. But yes, absolutely doing all of the iterations.

And then like I said in the prepared remarks, don't think we just run through the tape and then we're static for the next decade. Devon has a long history of reinventing ourselves and thinking about how do we further enhance the portfolio. And so we've got a real opportunity with this combination. We're going to be very intentional about it. As was mentioned earlier, the market is exceptionally hot and interested because there's so much public talk about it, we're getting a lot of inbound phone calls. And so it takes a little bit of time to process that and really evaluate, again, most importantly, to make the right decision for shareholder value accretion. So thank you again for the question, Josh.

Your next question comes from the line of Chris Baker with Evercore.

Clay, I would love to -- some great detail around the Delaware Basin in the slides. Would love to just get a sense of how you think about optimal scale there. Obviously, it's bigger today, but just in terms of the forward opportunity set and just any thoughts around potential use of proceeds to Doug's question, just around further scaling up that position.

Yes. Thanks for the question, Chris. If you're going to be the dominant player in any basin, I can't think of a better basin than the Delaware Basin. From our asset footprint, from the infrastructure that I mentioned, all the way through there is just so much value creation. We're looking at deeper horizons. We're looking at improvements on the gas opportunities. We have an incredible gas opportunity there. How do we truly optimize the value creation from that? There's so much kind of synergistic opportunity upside from having a dominant position there.

And of course, it is one of the least developed, kind of, least mature among the spectrum of the domestic -- the great domestic resource plays. So we love that position there. How do we think about additional bolt-ons? I certainly talked about the focus on trades, the focus on additional bolt-ons. Any additional opportunities, we're always evaluating. But as always, we have to be very critical about what we bring in. We're incredibly proud of the federal lease sale. I think we've done a much better job of articulating the why behind that. And so you can kind of get an idea of there's the bar. We find an opportunity like that, you bet we're going to be aggressive and add incredible value to the portfolio.

Your next question comes from the line of Scott Gruber with Citi.

Clay, leveraging AI is obviously a core pillar in your operational strategy. The services industry has also been touting their AI-enabled offering. So can you discuss your AI strategy between in-house development versus third-party sourcing? How has that evolved as you continue to push AI deeper into your operations? And how are you working with the services industry on the intersection between the software and the hardware to really squeeze the most juice out of AI?

Yes. Thanks for that question. You know I love me some serious AI. And it's -- yes, I love talking about it. I'm a huge champion. But look, our -- a little bit of our secret sauce is Trey Lowe. Trey has got a strong operational background. He actually worked for a major service company for quite a while. He's a distinguished SPE lecturer. He understands our business as well as anyone in this organization, and he happens to be a self-proclaimed technology geek, which I love all day. So Trey, why don't you tell us a little bit of your perspective on the question from Scott?

Yes. Thanks, Scott, for the question. We love to talk about what is happening here in this space. Clay mentioned it several times, we see technology as an advantage for the company. It's a differentiator. It's a place where we lean in. We've invested in our data sets for the better part of a decade, making -- really building that foundation and making them accessible to all of our employees and trusted. Whenever OpenAI launched ChatGPT about 3 years ago, Devon leaned in really hard and started applying AI across the entire enterprise and really focused on empowering our employees.

When we announced the merger, we really ended up with the best of all worlds, in my opinion. And the places where Coterra had invested heavily around the use of AI and machine learning model for well prediction and helping us with our capital plans married up really well with where Devon had invested, which was really heavily in the operational side of our business, production, drilling, completions and some other subsurface workflows.

And so all of those systems are zipping together today, and it's going to put us in a great place. And we've seen it already reaping dividends for our teams that are working through the integration where, just a year ago, it was taking us a couple of months to create new tables. Now we're doing these things in 2 days. And we see it in the results. We tried to give a flavor of what we're seeing through synergies from these AI tools, things like the closed-loop AI gas lift systems that we have, the smart gas lift systems. We're able to scale these things at a pace which just honestly, we've never seen in my career previously.

And on those specific applications, back to your original question, those are partnerships in many ways with some of our providers that are helping us with some of the puzzle pieces to put all these things together. But the real secret sauce is empowering our employees. With the gas lift system, we went from just a few months ago only having a few wells running automated, fully closed loop. And then in March, we had a couple of hundred wells, and now we're at 1,000 and we know in the Permian Basin alone, we've got well over 2,000 still in front of us. And in fact, just a couple of weeks ago, we applied this to the first set of legacy Coterra wells. And so just the pace at which we can move is unprecedented. We're seeing great results out of all those things. And that's just an example. But across the board, whether it's our legal team, our production team, we're seeing the same sort of acceleration of ideas and innovation. And we're going to see it flow -- continue to flow through to the bottom line.

Yes. And Scott, one thing I would just add, it's been incredibly fun for me to see our new Coterra side of the family really get unleashed on some of these tools. And the jaws on the ground, the eyes wide open, leaning forward, saying, "I need access to that now," has just been really encouraging and exciting and affirming of the work that we've quietly been doing kind of under the radar. So great synergy opportunity and look forward to talking more about it in the coming quarters.

Your next question comes from the line of Nitin Kumar with Mizuho.

I wanted to focus on something you are doing versus what you might do in the coming weeks or months. So you talked a little bit about in your presentation about surfactants and recovery factor is a big focus for the industry right now. I was wondering if you could provide some more color on what have you tested? Has it been localized to the Permian? Or have you tested in other basins? And just some of the things we're doing on that side of the house.

Thanks for the question. This is John. We've tested surfactants most broadly in the Permian Basin up to this point. And I think there's a distinction here we want to make. We've tested it both in the completion phase of our operation, but also the production phase of our operation. I think what Clay highlighted in his prepared remarks and what we highlighted in the deck was around the completions. And that's pretty exciting work that we've done to date. It's a fairly small data set up to this point, but I would emphasize that 90% of the wells that we trialed with surfactants had material uplift. We saw north of 15% at 180 days. So we're extremely excited about that technology. You heard Clay mention that we're going to scale that beyond 50 wells in the very near future. I would tell you that we're putting pressure on the teams to pump in all the wells and tell us why we shouldn't pump surfactants and really treat that more as an exception.

One thing we didn't talk about in the deck was the production phase. And so within the Delaware Basin over the past year, we've been active also pumping surfactants in the production phase. This is typically between 6 months and 2 years into the productive life of a well. We're also seeing uplift here. The results are a bit more variable. We see certain zones that perform better than others. But what I would generally say is we're seeing positive uplift here. So this is also yet another program that we're planning on scaling in the Delaware Basin, looking at going to 20 jobs a month. And beyond the Delaware Basin, we've got plans to expand that as well. Looking at the year-end, we're looking at the Williston Basin. But to the extent we continue to dial in our chemistry and have successful results, you can see us expand that even further.

Our next question comes from the line of Phillip Jungwirth with BMO.

With additional Permian egress starting up, how is the new Devon positioned in terms of takeaway and remaining Waha exposure? I assume this should be a nice cash flow tailwind for the pro forma company next year. And then you guys have always been really good on the marketing side. Just wondering how you view market concerns that new gas pipeline capacity in the Permian could push some of the basis weakness to major hubs in East Texas? And do you think there's enough takeaway for gas to flow further downstream to LNG? And generally, how are you positioned here?

Yes. Phillip, I'll take that one and start off. Listen, yes, we've been very pleased to see the recent Kinder Morgan expansion and the impact that's had in the second quarter is obviously a tough quarter on Waha. But going forward for the balance of the year, we remain positioned well between firm takeaway capacity and our hedge position. We've got over 70% of our production either hedged or down to the coast, and we feel good about that. We've got additional egress coming in later in the year and in the first half of next year on Blackcomb. And so we're excited about that.

And so next year, again, we would hope to be in that same level. Some of that 70% is financial hedges that will roll off, but we do have some in '27 and will continue to build. It's a big issue. It's something that's not just a near-term issue for us and for the basin, it's one that Devon has been pretty forward leaning into.

And I think as we think into the future, it's an issue that's not going away. So we'll continue to think about sort of multiple phases of ways to deal with it. One could be additional egress, two, through the financial hedging opportunities that we've got. And three, we will be -- potentially look at continued opportunities in-basin. For example, the CPV project that we've got coming online in '28 for 115 million a day that's going to be priced against ERCOT West will give us -- should give us an advantaged pricing relative to in-basin pricing. So we will continue to look on it.

Yes, your final question on how could this impact downstream along the Gulf Coast, absolutely. I mean we're super excited about what's happening with LNG and power development. But man, the industry has been really good at sort of meeting against those demands. And as LNG export capacity and supply ramps up, look, it could create more volatility in the long run. We're not immune to weather, and we haven't added any storage in a long, long time in that part of the marketplace. And so -- so yes, it's a big issue, and it could cause greater volatility in the future in some of that Gulf Coast pricing.

Yes. Last thing, just to wrap on that, Phillip. I mean what I would say is any time -- this is a saying that Greg Horne, our guy who runs all of our marketing for the company, he says, "Look, where you see a challenge, if you can identify it early and the position that we have, the upstream position that we have can turn that challenge into an opportunity." So yes, there's interesting challenges out there and every single one of them, we look through the lens of how do we turn that into a real opportunity for us to create incremental value from this incredible resource and world-class position that we have in the Permian Basin.

Our next question comes from Gabe Daoud with Truist.

Clay, maybe a higher-level question for you. Just since the deal has closed, the stock has been a little bit of underperformer relative to your new large cap peer group. I think we would all agree there's a pretty big value proposition here moving forward. So maybe just curious, what do you think is -- what do you attribute that maybe underperformance to? Is it -- do you think the market has become impatient around asset sales? Do you think maybe not fully recognizing the free cash flow ability of the pro forma or the synergy capture? I would love to maybe get a little bit of color from your perspective on what you think the market is missing here?

Yes. Thanks for the question, Gabe. It is not -- it is not lost on the team that we are underperforming, and that is a clear focus. And hopefully, messages like this today on the progress that we're making, the objectiveness we're moving forward, the aggressiveness and the pace that we're moving with. I think the challenge right now for the investors and my view is there's a lot of money kind of sitting around the hoop waiting to jump in. They're looking for a clear direction. And where do we go from here? Is Devon's go-forward more of this or less of that? And as I said, I would love to kind of telegraph that. I think it is the right thing to do for value optimization to make sure that we allow those processes to run. We don't -- we have not historically telegraphed where we're going to move to. We really believe that the value creation opportunity and keeping those cards a little closer to our chest is the right move for the shareholders.

In the short term, there's a little bit of pain. We have to deal with the rumor du jour and that's pointing investors into a different direction every day. I completely understand why that can be confusing to the investor. What I would tell you is we've met with at least 100 investors all over since the time of -- since the close. And what I get is a lot of encouragement, make sure you're doing the right thing first, make sure you're thinking about value creation and don't just rush into a quick high, sugar high on a quick decision. So that's the approach we've always taken and that's the approach we'll continue to take. But it's not lost on us. We've got time constraints. And every single one of us certainly, including me, feels the pressure of our share price, and we want to perform for our shareholders for the ultimate value creation, which is doing the right thing first.

Our last question comes from the line of Scott Hanold with RBC.

You all have made some early-stage investments in some equity investments and have several of these equity interests that have turned some pretty good value, Fervo and a few others. Just kind of curious on your strategy with some of these equity investments? And are there other opportunities you all are looking at?

Yes. Thanks, Scott. Yes, we have some home run opportunities. And again, I'll go back to the earlier line of where others see challenges, we see opportunities. We want to be known as a company that's always open for business. You've got a creative idea kind of bringing our way. As I said earlier, we're operations focused. We're technology forward. We're an energy powerhouse. And so that -- when you open that aperture just a little bit, things come your way.

The WaterBridge opportunity, the Fervo opportunity, some of the investments we've made on the midstream are all of the mind that we know our skill set. We know what our position, meaning our portfolio, how we can leverage that and it's turned some huge value-creating opportunities. There's more of that coming. I think those opportunities can turn into even further value enhancement. As we think about the current position that we hold, you've seen us buy a couple of quarters ago, buy into the Cotton Draw Midstream and kind of bought out a partner there. At the same quarter, we were exiting our Matterhorn position.

So the answer to the question, if we're a buyer or a seller, it's yes. We are in it for creating value for the shareholders. You'll see us continue to do innovative things. That's kind of core to our DNA. But don't think of any of these assets as something that we have to hold on to. Matterhorn as an example, the real objective there was getting the pipe in the ground, making sure that we had the takeaway capacity. As an enhancement to that investment, we went ahead and owned an equity stake. That was a 5x return on that equity stake. We still kept that critical takeaway capacity and made a very, very nice return in the process on the equity position. I would do that every day. Those are just phenomenal enhancements to our existing Delaware position.

What I would tell you is that opportunity only comes our way because we have such an amazing position in the Delaware. So leveraging that to not just how do you get the best return on this next well, but thinking about this world-class position in this world-class basin and how do you lever it into more and more opportunities. I think there's absolutely more of that to come. So thanks, everybody, for the questions. I'd say, let's -- Dan, maybe you can wrap us up.

Yes. I'd just like to thank everyone for their time and great questions. If anyone has follow-ups, please reach out to the team. We look forward to catching up over the next quarters. Thanks again for your time.

Thanks, everybody.

This concludes today's call. Thank you for attending. You may now disconnect.

Yes. Good morning. Arun Jayaram from JPMorgan's E&P and OFS Research team. Thanks for joining us for day 1 of our conference. This is one of the presentations that I really circled ahead of the conference because it's really an opportunity to meet with Devon Energy, who recently completed the merger transaction with Coterra and so Devon has been a little bit off the grid as they've gone through the approval process for the merger, but this is the first conference that CEO and President, Clay Gaspar, can really tell the story about the industrial logic of the deal. So again, Clay, welcome to New York. Thanks for joining us.

Yes. Thank you, Arun. It's great to be here. Great to be back -- out and meeting with investors. And when you have to go quiet, you're so anxious to tell the story. So happy to be here today and part of the conference.

Well, let's go ahead and start with the Devon-Coterra merger that was announced in February. For the generalists in the audience, can you elaborate on, call it, the industrial logic of why this deal made sense to you?

Yes. Certainly, I'll start there. When you look at the position that Coterra was in solo, that Devon was in solo, we're both in a really strong position, have incredible inventory, but always looking to improve. I think that's the nature of the business. And when you think about the overlap, specifically from the Coterra side, 2 of the 3 core assets overlap with the Devon footprint. And most importantly, the Delaware Basin, where we are now the dominant force for sure, and that is the nature of the industrial logic. You start -- I'm just an engineer, a simple guy by background, you start comparing maps and when the parts start snapping together, there's a pretty good indication that it could work. But then you think about the importance of getting alignment on culture, getting alignment on integration, what's setting the tone of who we are and how we can create incremental value, we have a very aggressive goal, happy to talk about on synergies.

And I feel very confident today as I look down the line of being able to accomplish this, and that's all value-creating opportunities to take what individually were good positions to take them into combined and something that's much better.

Great. Clay, it's been 47 days, if we did our math right, since the merger closed.

94 days from signing to close, 47 days from close to here. So yes, we are not sitting on our hands, letting grass grow under our feet. Thanks for the acknowledgment on that.

Yes. I can't remember a merger that closed so quickly. So kudos to Shane and the team...

Absolutely.

For getting it done so quickly. Give us a sense of how integration has gone thus far. And I know you guys have been very, very busy. What have you -- what are some of the updates from the first 47 days since the merger closed?

Yes. As I mentioned, I think moving with haste has been, kind of, part of a cultural reestablishment. You think about the 3 goals I set out as a CEO of the combined entity were remarkably similar to the 3 goals I set out as a new CEO of Devon 18-plus months ago. And that -- those were three: Number 1 was getting alignment on culture, setting the tone, really taking this opportunity to inflect, get alignment and really make sure that the combined organization all rolling in the same direction, pulling for the same common goal and doing it in a way that we can really ascribe as this is the culture of how we work and moving with great haste is part of that cultural establishment.

Second, having a near-term goal, everyone knowing how to quantify what winning looks like tracking, identifying, holding ourselves accountable, knowing what registers on the scoreboard. How do we translate that all the way through the financials and on a quarterly basis, bring our investors along. We had this 1.5 years ago with the business optimization work that we did on the Devon side. We're using that same skill mindset and even kind of operational tactics to apply to the synergy target.

So as I sit here today, 47 days in post close, the level of confidence I feel around accomplishing $1 billion of incremental value associated with the synergy is exceptionally high. The third thing on list is a long-term vision. Who are we as a company? How do we know that these shorter-term goals really contribute to the longer-term success? That's something we'll continue to roll out in the first 47 days, we haven't had the chance to really actively debate that as a combined team, get that together, get that alignment, bring our Board along and then really set a course for, what I believe, is incredible future value creation as well.

Clay, post the merger, you're one of the more active players in U.S. shale, the last count, I think you're running 31 rigs, 10 frac crews. Talk to us a little bit about capital allocation across your diverse plays that touch oil and gas NGLs and a number of different core U.S., a lower 48 place.

Yes, I think that's one of the kind of hidden areas of synergy or doing better work together. Individually, we had great assets. When you combine them, they get enhanced. Sometimes it's from the capital efficiency front, we're applying drilling and completion costs to wells and seeing a very significant improvement. That's about 1/3 of our synergy target. The second 1/3 of our synergy target is what we call operational or think about lease operating expense, gas processing contracts, enhancing those, but also improving run time and flattening base decline, really enhancing the value that we create from all of the base wells.

And then, of course, the third piece is our capital -- or excuse me, corporate costs, and that is just all the synergies that come bigger, better. So back to the part of reallocating capital. There's no doubt about it, the enhancement of our portfolio allows us to lean in and let that capital flow to the best performing assets. We're lowering capital cost. We're pushing more capital towards the Delaware Basin, our best productivity and our best capital efficiency. And so by definition, that enhances the value creation opportunity and which you'll see as a nice continued step-up as these synergies come to reality from '26 into '27.

Clay, on a pro forma basis, Devon is trading at a very attractive kind of free cash flow yield. So the pro forma business is going to be generating a lot of cash.

A great entry price one might call.

Great. For traders here, too. Can you talk a little bit about how you're thinking about capital allocation across core development, debt reduction, shareholder returns and some of the strategic investment opportunities.

Yes, this is certainly one of the areas I love getting investor feedback on. And inevitably, if you have multiple people in the room, you get multiple perspectives on this. We've approached this capital return mindset and essentially everything is on the table, and we will -- we have opportunities to step in and improve on all fronts. And so we start with our base dividend. We had a 30% uplift in that base dividend from the Devon side. $0.32 a share is a nice significant step-up, but also something that we truly believe throughout the cycle is very, very safe and secure that we never have to kind of go back on that.

We can always look to not only deliver that but also have an opportunity to step that up on an annual basis. Secondly, I think about our share repurchase program. We had signaled a $5 billion repurchase program. We've recently enhanced that, again, all in the first 47 days to even higher an $8 billion repurchase program. And we think about that kind of on 2 fronts: One, a very systematic approach. We're going to be in the market every day, every quarter. Think of it scaling up from where Devon was individually to the new pro forma size company. So somewhere around $250 million to maybe even $500 million on a quarterly basis.

And so think about that kind of scaling over time. What that does is it allows in a cyclical business to avoid that temptation of you got a lot of cash flow when your commodity price is up and potentially where your share price is up, and that's the exact wrong time to buy a whole bunch of differential shares. We would love to be able to just stack a bunch of cash during that period and then go back in when the inevitable down cycle happens and then we could go approach that.

The reality of the matter is we can't wait until sunnier days and dark skies to really optimize on that. So we want to be in the market continuously to operate in a very systematic approach. Now on top of that, there will be times of disruption that we can go above and beyond. So there's an opportunity to go really opportunistic on top of that.

And then third, certainly, not in third place, but a very good opportunity for us now is to further enhance the absolute amount of debt that we have. In the next couple of years, we have some significant bonds coming due that we'll be able to chip away at and continue to improve. We have a target of getting to about $9 billion of debt. That takes us below 1x in kind of a mid-cycle environment and something that we really believe needs to stand the test of time to make sure that we're watching through the cycle when we think about the direction of being sub 1x throughout the cycle as kind of a starting mindset of where we want our debt level to be.

My last question kind of on capital allocation. I was wondering if you could talk about how the company organization is kind of harnessing AI to improve capital efficiency and lower cost. One thing I did learn with -- being with you and the management team on the road is that your nickname is Clay -- Cl-AI.

I think -- I don't know where that originated, but I think we have moved from a place where a lot of my peers were pretty dismissive a few years ago to where I think any CEO that can spell AI, thinks they're an expert. I find it quite humorous. I can tell you, at Devon, we've been on the case really beating the drum, trying to get the excitement around the potential for this for years. We stood up our first internal firewall data map system in May of '23, call it ChatDVN. It was the 1.0 version. 3-plus years later, we're on a Gen 3 version of that. And what I would tell you is more exciting than just the technology is the embracing of that technology on all fronts.

It is really exciting seeing the wins from the back office to the guys that are on the front end of value creation every single day. Our drilling and completion teams have worked minor miracles in driving well costs down, really understanding the incredible amount of data that's flowing in every day and turning it from random knowledge into actionable intel and then I think about one of the things we talked in the last couple of calls about is the operational ability to optimize wells real-time, 24/7/365, fully closed loop with AI.

We now have over 850 wells running autonomously, optimizing the data -- the artificial lift settings, 24/7. We will extrapolate that to, what I think, is the potential to essentially all of the company, all of the base wells, all of the opportunity. We're seeing very significant uplift in that regular optimization rather than what's historically been done, say, once or twice a year from a real intensive amount of calculation and optimization work, we're able to do that real-time, all time.

There's hundreds and hundreds of examples further down the value chain. And I can tell you, every one of those wins are meaningful to the bottom line of the organization. And when I think about the opportunities that we have today with infusing that in the blended culture, it is a real significant step up that we continue to see very material upside value creation from.

Clay, the next topic is portfolio. I know that the company is performing a comprehensive review of each asset in the portfolio. Can you give us a little bit of an update on that process? What are some of the criteria you as a management team are looking at to see which assets stay in the portfolio, which may be monetized? And how does, kind of, tax leakage, kind of, enter into the equation?

Yes. So there's these moments in time where you get to really kind of reframe the question. And so when I think about individually, the 2 companies had optimized for their company outlook, management perspective, kind of view of the opportunities in hand and further opportunities. But when you come together, I mean, we are -- we have reset to a new organization. We're in a different weight class. We have different scale, different opportunities certainly starting with the Delaware Basin. We have the dominant position in the basin with a dominant operational ability with a position that I think from third-party views absolutely dominate anyone else from sub-$40 breakevens to $50 to $60 from Enverus' view, even Novi Labs recently wrote an article in last week or 2 extolling the virtues of our incredible inventory.

But starting that as a kind of a foundational footprint, you also have the opportunity to think, how do we further enhance that. And so we have the existing assets kind of that complement that base of business. And one way to look at it is in addition to the Delaware Basin, what other assets -- what are the characteristics of those assets to make us an even stronger company and so without getting into the details, preventing us from backing ourselves in on an artificial timeline or artificial expectations, what I would tell you is we think about it kind of through 3 lenses.

The first lens is what's the value of these individual assets. And we've done a fulsome review, both individually and collectively as now as a new team, thinking about what's the inventory? What's the competitiveness for that capital? What's the upside potential in us applying technology, applying some of these synergies, thinking about the scale of the company and how do we lean in to enhance that value further.

How do we think about the long-term value applying technology, things like enhanced oil recovery that are still yet to really get fully understood and quantified, but certainly have exciting upside from where we're at today.

The second lens that we think about these assets are, how does the market view that? Right now, there's a very strong buyer's market for assets, and that's across the board, both oil and gas, we think about these different positions, be it the ABS money that's really entered the space, made a big splash. We think about the private equity buyers that express a lot of interest in a lot of the basins that we're in. And then, of course, the strategic players where we just think about what's the natural fit, who would have that logical snapping together and enhancement opportunities that they can create value even more than how we're creating value from these assets today. So a very objective view of how does the market see these assets.

And then the third, I think very fundamentally important is how do we think about the strategic fit of these assets. Sometimes these individual assets can further enhance even amongst themselves. You take applied learnings from one basin to another. You think about complementary pieces of business that may be able to endure a storm, be it in a state, in a commodity swing. Any of these things that can come our way without much notice, how do we build a stronger company together from a strategic point of view.

So what we've telegraphed is this is more of a month's exercise, not a year's exercise. We've talked about the incredible pace at which we're moving. This is the same objectiveness, the view at which we were approaching this, we are aggressive. We will be mindful of how do we take this moment in time to create more value for the shareholders.

Last piece, you mentioned tax leakage. I would consider that part of maybe a second part of the consideration. Absolutely, we think about things after tax. When you profit over time, you end up paying a fair amount of taxes. We are a true taxpaying entity, proud to report. And part of that is the tax consequences of any said transaction. I would put that a little bit more second tier than the primary drivers that I articulated first.

Great. Maybe you could just spend a moment and talk a little bit about your feeling of where Devon's pro forma position in the Delaware Basin stacks relative to your peers. You mentioned a couple of third-party studies. But maybe you could just talk a little bit more about that.

Yes, I would say I love doing retrospective look back, how do we do things better? How do we get smarter. One of the things we really pride ourselves on is learning from others. Every one of our peers, every one of our service company partners, from our own experiences, how do we do things better. And this merger is a perfect example of that. You had 2 individual companies that are essentially fighting the same fight, doing things sometimes a little bit differently. And so how do we think back on how is it that one company did something a little bit better? Or maybe it's a third party out there that does it better than the previous either company.

I think one of the things when I look back on Devon, the thing we could have done better, has been a little bit more decisive and a little bit more pounding the table on the incredible value we have and the inventory that we have in the Delaware Basin. Now you enhance that with the Coterra side as well and it's just evident. I mentioned in Veris' kind of a third-party, essentially the standard that many people use, I lean towards them. They don't get everything right, but directionally, they do an amazing job. And what they will tell you is we have an incredibly, incredibly strong portfolio that dominates anyone else in the basin.

I mentioned the Novi Labs, another third-party view that looks at this. They point to 20 years of opportunity that we have in the basin. And every day, we're getting smarter and enhancing more and more value from that. So I get excited on a couple of different fronts.

One, the quantum of that inventory, but also the nature in which we do that. I don't see another peer, and I say this humbly, that can stand toe-to-toe with us on what we're doing in the AI front. And that is, I think, evidenced: one, by the work that we did on the Devon side around this business optimization. So much of that was underwritten by application of technology. And then this is very much a prove-it story. We have lots of catalysts ahead on proving this next $1 billion of value creation. I sit in front of you today, exceptionally confident in looking forward to the updates that are coming your way on being able to deliver that.

And once again, applying the learnings, the operational savviness, the technology orientation on an incredibly strong inventory that we have today, I think, is just an incredible investment opportunity.

Clay, post close, the stock experienced some volatility around the recent lease sale where Devon committed a little bit more than $2.6 billion of capital...

Absolutely.

For 16.3 thousand acres in the core of the play. Can you may be clear the air a little bit on the lease sale? Why do you think this was a good capital allocation decision? And maybe provide some inside baseball on how you prepared and attack that lease sale.

Yes. So this is something, Arun, I got to hear a few times we were traveling last week. And I think, again, I love looking back how to -- what do we do well? What could we have done better? What I would tell you, the performance on this lease was A plus. A plus across the board, we did a phenomenal job. Think about this, 13 days before the lease sale, we were 2 individual companies that had to abide by the rules that we could not share intel on bid strategy. It's a very hard line, we are boy scouts. We will follow the rules. We will stay letter of the law specific on this. Very, very, very important on that.

The morning of the close, we had 2 teams staged in Midland that had done individual work that all of a sudden broke forward the combining mutual discovery of how do we individually value these assets. I can tell you there were some things we really agreed on. I think the much more exciting things was where we disagreed. Where do you see something differently? How did you underwrite that landing zones? Where do you have knowledge on the performance, the well cost, the third-party benefits that we can apply to this. And you think about that mutual discovery that we had to get aligned on.

And then very importantly, we had to get the management team aligned on. And then very importantly, in 13 days, we had to get a newly constructed board that hadn't even met sometimes in the same room aligned on a multibillion-dollar aggressive target into something that was a very, very unique kind of once-in-a-generation lease sale.

This lease sale of this scale is not happening routinely. There will be other lease sales, 50s and hundreds of millions of dollars, but a multibillion-dollar opportunity, in our backyard of our dominant position is just not something that was going to come along on a routine basis. So let me tell you just briefly a little bit about the mechanics that I think have been missed along the way. And when I look back, self-critically, how could we have done things better. I think this is the part we could have done better on articulating the really importance of the mechanics of how things were bid and how they were won as opposed to the Gulf lease sales of the past, where you have a sealed bid, a single number that's notoriously left millions and millions of dollars on the table between the highest and the second-place bid.

Every track that transacted, it's an eBay style bid, you win by $1 per acre, $1 per acre. So there is no money left on the table. This is truly understanding value discovery and market realization of these assets. And many times, there was a third and fourth place bidder aggressively going after these bids, okay? Something else that I think the general public missed and even the sell side, besides my brother here, may have missed is the nature of this acreage and why it is not a good comparison to other private equity deals that may have recently transacted.

The nature of private equity is an assembling of assets, most often partially developed, most often partially developed from the very best zones. Maybe it's a single well holding that landing zone. Maybe they just develop the Upper Wolfcamp, the very best of that rock and then everything else that remains is partially impacted, maybe a little bit second tier relatively speaking, to what was already kind of developed. Remember the private equity folks get paid the most on the value that's developed. So that's a motivation there. Compare and contrast that to the lease sale, where these are untouched virgin acres, they have never been touched.

And so you have a full grass to granite, as we describe it, 87.5% net revenue interest that is vastly different than the state-of-the-art, 75% is the standard on the Texas side, 75% working interest that is anything on the state side of New Mexico, the fee side of New Mexico is the standard. These are 87.5% untouched acres that are in our backyard that we already have infrastructure, both water electricity, gathering, gas gathering, oil gathering, gas processing that we will make money upon money upon money in our backyard, we make the dominant position, your damn right, we spent $2.6 billion, we would do it again if it came up tomorrow, it's not going to come up tomorrow.

This was something that we had, while it's ill-timed from an idealistic standpoint, May 20 had happened on May 20. We closed on the 7th and in 13 days, we did what I think is a phenomenal, phenomenal acquisition that will incredibly well stand the test of time.

Great. Thanks for that detail. Maybe a 2-parter. Could you talk about just confidence on the $1 billion of synergy capture relative to the $1 billion optimization program that you successfully completed at Devon. And then the second part of it is maybe talk a little bit about the ability to lower well costs in places like the Delaware.

Yes. I appreciate the way you asked the question because I think there's relative context to 18 -- I'd say, 14, 15 months ago, when we launched the business optimization for the Devon side of the family. I was a new CEO. I knew that there was a moment in time when you can really capture the -- not just the attention of investors but maybe more importantly, the attention of the employee base. What's different? Clay, you have a similar background to your predecessor Rick. You were already the COO, is anything really changing. And what I wanted to really grab a hold of that attention was, yes, these 3 things are changing, what I talked about, the culture, the near-term value creation opportunity and the long-term vision.

Specific to this near-term opportunity, we really set out this focus around sustainable free cash flow. In our view, it was a holistic catch. It wasn't just minimizing G&A or even just minimizing cost, it was value creation. So thinking about the top line of how do we reduce downtime, how do we improve our recovery factors. How do we drive more value from the wells that we're drilling, maybe even more importantly, from the wells that are already existing production, absolutely addressing every part of that the value erosion that happens through G&A, through GP&T through LOE. And then at the end of the day, what's left over is that -- thinking about the capital, thinking about the free cash flow as what's left over and then just not in a short-term time frame, but sustainably, how do we think about creating more long-term value creation from a free cash flow perspective.

That was the nature of that deal. What I would tell you is the small group of us that got together, we went back and forth, we challenged back and forth and again, amongst a small group, without having the benefit of really surveying the land and saying, okay, where are those opportunities? We came up short of $1 billion. We also came up with a time frame that looked more like 3 years rather than 2 years. And so thinking about how do we draw the attention of the investors and to something that is big, hairy and audacious and really putting a line around that.

So we leaned in. And I can tell you, it was an uncomfortable lean, but I knew we had confidence that once we got this flywheel starting to turn, there were so many more opportunities that we couldn't just see amongst this very small group that had contemplated this very aggressive goal. Now you compare and contrast that to a year later, we sit there with the opportunity of an actual transaction. We know that Coterra is bringing best practices, that we are bringing best practices to this combination. There is absolutely real fundamental differences and there are best practices that we can apply. And so really, when we started coming together, interestingly, the Coterra side of the family came up with $1 billion from 1 direction, we came up with $1 billion from a different direction. And when you add the two, there's some complementary benefits.

I feel very confident in being able to deliver that. And then you add on top of that, the mechanism that was already in place from the Devon side, identification, tracking holding ourselves accountable and ultimately delivering to the shareholders in a very transparent way, these values all the way through the financials. That mechanism is already a native language to us. The flywheel effect of technology and the hunger around the organization is incredibly excited. We will deliver -- I almost said we will outrun. We will deliver very confidently this $1 billion, and I feel very confident being able to do it today. You specifically asked about capital.

And in one way, that third, we call it kind of the first third, is the most transparent. There's nothing like drilling very, very, very similar wells right next door to each other and comparing cost. And when we do that, we see well north of $1 million a well opportunity for us to apply starting day 1, really starting to apply even before we closed. There was kind of a, what we call, mutual discovery opportunity where we saw low-hanging fruit that we've already aggressively started to go after. We've telegraphed with our balance of '26 opportunity that these synergy opportunities will already start to manifest by year-end '26. We have a very aggressive goal for the balance of '27. Later this year, we'll start to tell you a little bit more about those tangible forecasted numbers for '27. You'll see that the synergies baked into that. And then by year-end '27, we will have achieved these really important goals that we have.

Clay, we're almost out of time. But real quickly, you provided the market with updated pro forma guidance for the back half of the year in 2026 in mid-June. What are kind of the quick takeaways from that?

Yes. Look, this is early in the process. We wanted to make sure that we had an opportunity to come together, that it's reflective of the synergies, and there is some of that baked in, but we all know you start from 0 and you start to build this in. What we've telegraphed is by the end of the year, you'll start to see some of this value capture, but it is better. I mean, day 1, we've already leaned in and said, just taking the pro forma -- the Coterra numbers, but plus the Devon numbers, we're already doing better than that from a capital program and from a production standpoint, but there's so much more to come as we work towards our '27 goal.

Great. Clay, we're out of time. Thank you so much.

Thanks, Arun. Appreciate it, everybody.

Welcome to Devon Energy's First Quarter 2026 Conference Call. [Operator Instructions] This call is being recorded. [Operator Instructions]

I'd now like to turn the call over to Mr. Chris Carr, Director of Investor Relations. You may begin.

Good morning, and thank you for joining us on the call today. Last night, we issued Devon's first quarter 2026 earnings release and presentation materials. Throughout the call today, we will make references 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, President and Chief Executive Officer; Jeff Ritenour, Chief Financial Officer; John Raines, SVP, Asset Management; Tom Hellman, SVP, E&P Operations; and Trey Lowe, SVP and Chief Technology Officer.

As a reminder, this call will include forward-looking statements 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 the SEC filings and earnings materials.

With that, I'll turn the call over to Clay.

Thank you, Chris, and good morning, everyone. Thanks for joining us. Today, we'll focus on Devon's strong first quarter 2026 results, which once again demonstrates the operational excellence and financial discipline that defines this organization. After walking through our Q1 results, I'll turn to a quick update on our transformative merger with Coterra Energy.

Now let's turn to Slide 3 for a deeper look at our first quarter results, which reflects strong execution across the business. As you can see on this slide, beating on production and capital once again resulted in impressive free cash flow for the quarter. Our production optimization efforts drove oil to 387,000 barrels per day, reaching the top end of our guidance range. Capital spending came in 6% below the midpoint of our guidance as we continue to capture drilling and completion efficiencies through advanced technology and focused execution across the program. Combined, these efforts translated into $816 million of free cash flow in the quarter, demonstrating the capital efficiency of our program and positioning us to return substantial value to shareholders.

I want to emphasize that these results are not isolated wins. That kind of consistency doesn't happen by accident. It's the direct outcome of the exceptional talent and commitment of our teams across every basin.

Turning to Slide 4. What makes this story even more exciting is where we're headed. On a stand-alone basis, Devon is entering the second quarter with significant upside torque to free cash flow. Production is expected to step up. Our cost structure remains well controlled, and the commodity backdrop is meaningfully stronger than what anyone underwrote coming into this year. You can see the sensitivity of this business to commodity prices on the right side of the slide. This is a very compelling yield profile in any environment, and it reflects both the operational gains we have delivered and the natural leverage of a high-margin portfolio. We are running the program we laid out, capturing the operational gains we committed to and letting free cash flow accrue to our shareholders.

Turning to Slide 5. The key free cash flow strength I just walked through doesn't happen on its own. It's the direct output of the business optimization work we launched just over a year ago. I'm pleased to report that we will achieve our $1 billion target well ahead of schedule. We will accomplish this major milestone with contributions from every part of the business, including capital efficiency, production optimization, commercial improvements and corporate cost reductions. I want to take a moment to thank the entire Devon organization for making this happen. When you challenge this high-quality team with a clear mission, you might as well consider it done.

Business optimization has transitioned from a one-off project to a new cultural mindset. The focus and accountability that we built will translate directly into our integration work with Coterra, and I am confident this foundation will allow us to attack the merger synergies with the same urgency and rigor.

The engine behind that innovation is technology and AI. I want to spend an extra minute here because I think it is the most important insight about Devon today that isn't intuitive from just a cursory analysis of the financials. The AI revolution is real. And what is happening across this organization is incredibly exciting. Internally, we talk about the 3 waves of AI impact. Basically, Wave 1 is a much more immediate connection to Devon's massive stores of data, transforming what was inefficient data hunting time into data analysis and value creation time.

After years of cleaning and organizing our data, we have a fully firewalled internal tool called ChatDVN that has been up and running for 3 years and is today a standard part of our daily workflow. We are now deep into seeing the benefits of Wave 2, where the AI is doing the heavy lifting of complicated calculations and time-consuming work. Examples of this are leveraging AI to write code for new apps and also translating the massive drilling completion and production data flow into actionable intel that our engineers can immediately act upon. Wave 2 value is showing up in cutting-edge drilling and completion time, directly translating into lower capital costs.

We are also having very significant wins in production, leveraging AI created tools to do real-time artificial lift optimization. We now have over 850 wells on fully autonomous artificial lift optimization with a very impressive productivity improvement. We are now moving into Wave 3, where we are redesigning internal processes from the ground up with AI at the center. That is the frontier, and Devon is leading the industry there.

Slide 6 is a great example of where technology and AI are showing up across the business. We have shown this slide in past quarters to highlight some of the key initiatives that have contributed to the success of the business optimization plan. I'm not going to walk through all of these today, but the one thing I do want to point out is this. The ability to see business optimization show up in the financials is what gives the program its credibility. On the right side of the slide, we have highlighted key milestones along with where we started and where we ended so that you can track the progress directly. This is the same playbook we will leverage with the Coterra integration.

Turning to Slide 7. As we've discussed in past quarters, parallel to driving incremental value out of the day-to-day business, we are also regularly evaluating opportunities to optimize our portfolio and enhance shareholder value. The strategic transition -- transactions and portfolio actions we have executed have already collectively delivered over $1 billion in present value uplift to our enterprise over the past year, and these gains are in addition to the improvements from our business optimization initiative.

The primary update this quarter is on Fervo, which recently filed its S-1 for an IPO, an important milestone for Fervo and for our investment. This milestone is significant in providing a public marker for our investment, highlighting the value uplift we have created. The partnership is pioneering next-generation geothermal technology and leveraging our core skills in geoscience, horizontal drilling and completions and data analytics while positioning Devon in a power generating sector with more significant growth potential.

Now turning to Slide 8 to what I know is top of mind for many of you, the status of our transformative merger with Coterra Energy. I'm pleased to report that both the Devon and Coterra shareholders have voted overwhelmingly to approve the merger on May 4, and we expect this transaction to close tomorrow. I cannot be more excited about what this combination means for our shareholders. The industrial logic is undeniable and combining 2 strong operational teams overlapping in each other's best basins creates substantial opportunity to enhance efficiency and drive results.

Pro forma, Devon will be one of the largest independent E&P companies in the United States. In addition to scale, our asset quality, inventory depth and balance sheet strength positions us to deliver durable free cash flow and returns through any commodity cycle.

Our go-forward shareholder return framework will be thoughtfully designed and competitive with our highest quality peers. It will be balanced between dividends, share repurchases and debt repayment. Subject to formal Board approval, our dividend will increase by over 30% on a per share basis starting in the second quarter.

Additionally, both companies paused their share repurchase programs between deal announcement and close, building cash during a period of unexpectedly strong commodity price. With the repurchase program immediately resuming post close, we were positioned to increase repurchases activity beyond our legacy level and capitalize on any discount for our intrinsic and relative value.

Integration planning is progressing extremely well, and I want to be clear, the $1 billion synergy target is the floor, not the ceiling. In fact, as of this morning, our integration teams have already identified 156 distinct value capture opportunities, underscoring both the depth of the upside and the sense of urgency we are bringing to this work. Once we close, we will move quickly to bring the same business optimization discipline to the integration effort and provide transparency in every step along the way.

Before I close, I want to address something directly. Naturally, on the back of the announcement of our merger, we have fielded questions about the opportunity to reallocate capital within our pro forma portfolio and also the opportunity to evaluate the go-forward asset composition of the company. First, I am confident that with our new combined portfolio, we will have opportunities to further enhance the efficiency of the capital investment program. Second, actively managing our portfolio is core to who we are as a company.

Devon has a 55-year history of buying and selling assets, and we are always seeking opportunities to enhance near- and long-term shareholder value. Every asset in the combined portfolio has to compete for its capital and earn its seat at the table. We have initiated a complete review of all assets against our strategic and financial criteria. While we do not have any preconceptions about future actions, we are excited to thoroughly review the portfolio with the soon-to-be combined Board and remain open to all alternatives that enhance long-term value. We will be thoughtful, disciplined and move with speed.

Every option will be measured against one test: does it leave Devon a stronger, more focused company on the other side. To be clear, this merger has added depth and quality of inventory in the Delaware Basin and positions Devon to deliver peer-leading capital efficiency for the foreseeable future. Our discipline paired with operational excellence, financial strength and unwavering commitment to shareholder returns is what gives Devon its unique investment proposition. With the Coterra merger on the verge of closing, we're entering an exciting new chapter that builds on this strong foundation. We expect to provide combined full year guidance in mid-June once management and the Board have appropriate time to align on the company's plan.

With that, operator, I would like to turn to our first question.

[Operator Instructions] Your first question comes from Arun Jayaram of JPMorgan Securities LLC.

Yes. Clay, I wonder if you could provide more details on this portfolio review process, which obviously will pick up steam when you close the merger in a couple of days. Perhaps you could maybe articulate kind of the criteria that you and the team are looking at to establish what you believe are going to be core assets at Devon. Could it be inventory durability, commodity price mix, et cetera? And also that if we look forward and you do decide to monetize some assets in the portfolio, should we think about your intention to redeploy those assets, redeploy those proceeds into perhaps coring up existing positions, potentially looking at buybacks given what looks to be a really compelling valuation of the equity?

Arun, there's a lot there. You hit all of the top 5 of the questions we presume we would get today. I will try and be very as specific as I can. Of course, you realize the last thing we want to do is box ourselves into something that is preconceived before we actually do the work, have the deep conversations, do the real critical review and objective review, and again, moving swiftly and then making sure we're aligned with our Board going forward.

So what I would tell you is kind of highlighting, thinking about capital efficiency, inventory depth, free cash flow, overall fit, how all these pieces fit together is kind of the tone and the nature of the analysis. But I can tell you, it is not a simple formula that we goal seek on and it spits out an answer. This is stress testing from every conceivable scenario, thinking about near-term wins, thinking about long-term lenses, thinking about the market, the use of proceeds that you're talking about. And again, going back to that test of how do we make Devon a better Devon, how do we deliver more value near term and long term for our shareholders.

So I appreciate the question, and I'm sure we will get plenty of follow-ups. But the most important thing for us is please know that we are going to move swiftly, decisively, aggressively into this. We just do not think it's prudent to box ourselves into any preconceptions of what that could look like with an ill-conceived time line or any kind of cadence like that. But I appreciate the question.

Got it. And I have a housekeeping question for Jeff. I was wondering, Jeff, there are some moving pieces regarding 1Q taxes and your forward look on taxes. Could you just provide us an updated view on what's going on there? Obviously, assuming it's related to the move in commodity prices. But just give us some thoughts on what the go-forward cash tax guide could look like?

Yes, you bet, Arun. You're right. We had some noise in the Q1 tax outcome up to the positive. Obviously, it was a flip from deferred to current, which created a real benefit for us in the first quarter. And then as you saw with the second quarter guide, we moved the rate higher as a result of that. That's a function of the flip that we had between current and deferred, but also a function of the higher commodity prices and the capital efficiency that we're seeing. So as Clay mentioned in his opening remarks, we -- none of us were expecting to have the level of oil prices that we've seen here in the back half of the first quarter and here into the second quarter, and we're projecting that at least to some degree into the back half of the year. So as a result, we're generating significantly more pretax income.

As you know, you've heard me say in the past, free cash flow generation is a good proxy for pretax income. And with the capital efficiency that we're seeing from the teams, which has been phenomenal, married with the higher commodity prices, we're really getting into a position where we're just seeing some of that tax shield get utilized on a faster basis. And as a result, we've moved our expectation for current taxes into the back half of the year a little bit higher. So we're -- for the full year for Devon on a stand-alone basis, we'll still work out to be somewhere around that 10% level, but that will be a little bit higher in the next coming quarters given the low rate we had in the first quarter.

Your next question comes from the line of Neal Dingmann of William Blair.

My first question is on Permian activity, specifically as we continue to see higher Waha, kind of negative Waha prices. How much does this impact your future Permian decision based on what you're seeing there and maybe how much exposure you have to Waha?

Yes. Let me pick up on that, and then Jeff can add a little bit of color. Really proud of the team's proactive work. As you know, we've been very aggressive in participating in additional pipe. We've helped underwrite some of the pipe. We have additional capacity coming on with Blackcomb later this year. Positioned well, but certainly have marginal exposure to Waha prices. Inevitably, what we're doing in those environments is we're looking to the highest gas/oil ratios, the gassiest of our assets and pulling back on those -- on that production during that time. You saw a little bit of that in the first quarter. We can manage that exposure with the nominal amount of exposure we have by pulling back on some of that activity. We'll continue to fight the good fight.

Think of this, when there is a call for Permian gas, think about the opportunities that we'll have, especially when we've got the positive realizations once we get the infrastructure built, really excited about the future for Delaware when the inevitable call for the gas will come.

Jeff, additional comments?

Yes. No, Clay, you nailed it. As Clay mentioned, when Blackcomb comes online later this year, that will further limit our exposure to Waha. We'll be, call it, 10% to 15% exposure to Waha at that point going forward. As Clay mentioned, the team has done a great job of trying to manage the exposure, shutting in some of the high GOR wells, which has helped us in addition to the infrastructure takeaway that we've got. We continue to believe there's going to be a need for more takeaway from the basin as we move into '27 and beyond. And so as Clay mentioned, the team is very much focused on evaluating opportunities to further limit our exposure as we move forward into the future.

And just one other final comment on that, making sure that everyone is paying attention, not just the realized gas price, but also some of the value of the hedge comes through other line items. So making sure we're being thoughtful about how we're protecting is not always physical, but sometimes it's financial hedges that we have in place that show up in other lines of the financial statements.

Great point. And then, Clay, just a second quick one, just on what I would call new ventures. You all continue to own a decent size of Fervo, and I'm just wondering, do you all anticipate continue to take positions maybe in additional geothermal or other, what I'd call newer type ventures?

Yes, it's exciting. I mean I think we have -- we've dabbled in a few ideas, thinking about how do we leverage this amazing -- the talents that we have, you think about geoscience, you think about drilling horizontal wells and completing horizontal wells and building facilities, like that's what we do. Like where else can we extrapolate these skills? And what we found is an incredible Fervo team. We've really enjoyed the partnership with. Happy to be alongside those guys, and we'll continue to look to other ways to expand Devon's footprint.

Trey, do you have other comments there?

I appreciate the question. There's a lot of exciting things happening at Fervo. And we took our stake in the Series D and led that round. We've obviously been very happy with the investment that we've had there financially as well as the investment that our teams have poured into them with just different technical advice over the years and seeing them continue to derisk enhanced geothermal systems operationally and technically.

The thing that we didn't expect really going into that first investment was the power demand that we see for firm always-on, 365-day power that we're seeing across the United States, especially Western United States. And we continue to be pretty bullish on that power demand story. This gives us some exposure to it, and we're definitely interested as the technology continues to get derisking.

But I think back to the spirit of the initial question, we're pouring ourselves into the success of Fervo at this point, and that's been our focus as a company.

Your next question comes from the line of Neil Mehta of Goldman Sachs.

Congrats on the shareholder vote. And that's kind of where I wanted to start, which is the synergies. It sounds like you're tracking towards the $1 billion of cost optimization and the margin stuff and the corporate cost stuff. But can you talk about early wins, thoughts on whether you could pull forward the year-end '27 target just to kind of make this a little more tangible for us?

Neil, I love the attitude, man, we hadn't even started the race, and you already want to pull forward the finish line. That's my kind of thinking. What I would tell you is I am exceptionally confident in this combined team's ability to really come to pulling the rope in the same direction, getting integrated, getting a unified culture. I mentioned the 156 projects that are already identified. What doesn't come through in the numbers is the mutual excitement of the wins we're seeing from both sides of the ledger. It's really a true synergistic opportunity.

We're seeing those things in all the major categories from D&C capital optimization that will come really quickly. We're seeing some upside in production. We're thinking about how do we reallocate capital inside the portfolio. Even the hardest work that we do around what's the optimal spacing, staggering, sequencing and completion design of a place like the Delaware Basin, we've got 2 really strong teams that have worked these very hard problems in isolation. And now you've got the benefit of 2 strong teams, brilliant folks coming together and sharing their best ideas. And boy, that -- if I've ever seen synergy, it's that.

I really -- what gets me exceptionally excited is kind of the mechanics behind it. I rewind back to the WPX-Devon merger. We signed the deal work so hard to get to the point, then we looked at each other and said, "Okay, what do we do now?" And man, we started scrambling just to figure out how do we capture these things, how do we monitor, track, hold ourselves accountable, make sure that it's flowing through the financials. The beautiful thing with this position we're in today is we've just established some really great mechanics behind this. Trey Lowe led that -- the business optimization project. It's already very fluent on this side of the -- on this side of the family on how that works. I don't anticipate any issues in getting those mechanics applied to all of the opportunities.

And then I'll go back to my comments from the script. Technology is the key innovative underwriter of so much of this. And we're just getting started. I love bragging on the team. I can get -- I can go for the next 30 minutes on the excitement around some of the work that we're doing and how it turns ideas into value. But I can tell you, we are in the exceptionally early innings of those wins. And now with this combined footprint, this amazing Delaware Basin is our crown jewel asset. You combine the 2 positions together and then you start applying all of these -- the brilliant ideas and people and technology, just watch out. We can't wait to deliver on this. And like I said, I consider it the floor, certainly not the ceiling.

Yes. That's -- it's a great point about the Delaware really becoming the star of the portfolio on a pro forma basis. And you already have a Delaware concentrated program, but it's only going to be more so. I think you alluded to this, so maybe you can kind of comment on that a little bit. What would be the advantage of moving the portfolio a little bit more towards being Delaware-focused versus diversified, recognizing you've got a portfolio process that you're looking at. But just at a high level, what would be some advantages of being more focused as an organization?

Yes. Look, I don't want to presume that we are, in any way, not focused. We certainly have the scale, the capabilities, the teams in place that it's not like we can only work in one basin at a time. So I don't want that at all to be the presumption going in or some kind of limiting factor. But I think we want to be exceptionally objective about all of the possibilities on how to enhance this company's value, both short and long term for our shareholders. And so I'll go back to the prepared remarks about the opportunities that we have to really do the thorough work to move through diligently, evaluate every scenario and not just which basins we're in, but thinking about all of the potentials, the upside that we have in other areas and how do these pieces work together.

Don't forget, this ranking in opportunities can significantly change when you apply $1 billion of synergies. Think about the enhancement of the opportunities that we have with much lower D&C costs with better production, thinking about how do we stack and stagger these wells and improve the outcomes. That can really change the game and put us in a strong position maybe with the assets we have, maybe we see something else that fits even better into the portfolio as a bolt-on type opportunity. All of that's on the table as it always is. I just want to emphasize, we don't want to presume one direction before we actually do the work and have the important alignment conversations that we need to have with the new management team and importantly, with the Board as well.

Your next question comes from the line of Scott Gruber of Citigroup.

Clay, you're obviously flushed with cash here. You have the integration in front of you. Guessing you and the team may not be inclined to change the combined activity program much and just focus on synergy capture. But I'm thinking about where you could deploy some extra cash, how do you think about refracs in the Eagle Ford or even the Bakken in this environment, those appear to be an area where you can deploy some modest incremental capital, get a quick payback, but not really deplete core inventory? Just some thoughts there.

Yes, I appreciate that. And we're always looking to enhance, and that could be within the existing portfolio, capital allocation and refracs are a great example of that. I would say one thing that's -- we've probably gone quieter on refracs over the last several quarters. And here's the odd result or the leading indicator that came from that. We have improved our D&C cost and efficiency so much that now we're seeing the drilling side of the equation, which is basically the part that you're eliminating in a refrac, we have driven those costs and efficiency in so much that it's becoming -- those refracs now have to compete with new wells. And so we've probably done less of those.

We're excited about some other things that we have in the hopper, some longer-term wins around enhanced oil recovery, some exciting early projects we have there. We've talked about the surfactants that we've done tests in the Permian and other areas we're working on as well. Those are really impressive returns. That probably accrues more to the LOE side of the ledger than the capital side, but certainly always looking where we can make a differential investment to lean in. We want to remain disciplined on our capital. We ultimately have our long-term best interest in mind along with these -- the shorter-term wins. But however we can improve those wins along the way, we're happy to deliver on.

No, it's good color and good perspective. So with this extra cash, you kind of mentioned the investigation of EOR and obviously, surfactants have been a hot topic the last couple of quarters. What do you do with your extra cash? I mean do you push harder on EOR or try to deploy more surfactants? Do you deploy more into AI and try to accelerate incorporation of those technologies into your operations? Just kind of what do you do around the margin with the extra cash?

Yes. I think there's a pretty big disconnect from these projects we're doing on the margins. I mean, surfactants are incredibly cost effective, let's just say. And when we think about some of these other ideas that we're investing and derisking over time, they are relatively small investments and probably will remain that way for a bit. The cash that you're talking about, the billions of dollars of free cash flow that we as stand-alone Devon and certainly as a combined company will generate, I think we think about dividend policy, we think about share repurchases and we think about debt repayment, how do we optimize those. And as you well know, different quarters and different opportunities can present different opportunities that we want to be nimble around.

But once again, it's important we get aligned with our Board. These are absolutely Board-level conversations that we want to make sure we don't preempt that process. We need to get aligned with them. But I think structurally, what we've talked about pre-close is enhancing that dividend, likely to announce a very significant share repurchase program that we could move aggressively on. And then also, of course, we look at the debt and inevitably, when you combine companies, just like when I look back at WPX, there were some real day 1 early wins that we were able to do on the debt front to enhance value to shareholders. So I would say that's the probably more material opportunities that we have for cash return to shareholders.

Got you. Yes, I was just wondering about those kind of second level investments that may accelerate. But I appreciate all the color.

Your next question comes from the line of Josh Silverstein of UBS.

On the merger webcast, you had put out there that you had 10-plus years of inventory at the current development pace. And I know this was a third-party estimate, but I'm curious, given that you guys are going through this big cost reduction program, once you start adding those into the equation here, how are you thinking about the kind of pro forma depth of that basin? Does it push towards 15 years? Is it greater than that? Because it feels like the cost of supply of that basin is moving much lower for you?

Well, certainly, the cost of the wells can materially extend the runway. Think about the kind of the creaming curve and that tail that are just right on the bubble. As you lower those costs, more of those yellow lights turn into green over time. But I might ask John just to add a little bit of color on what he's seeing when he thinks about combining the Delaware Basin footprint.

Yes, Josh, we need to go do a lot more of that work to get you probably more specific numbers, but I'll give you just a corollary back to 2025. So when I think about all the capital efficiencies we had in 2025, we saw our costs consistently move lower. That allowed us to do some really good work on downspacing. And when I go back and look at the risked resource replacement that we had in the Delaware Basin from not only our appraisal, but specifically downspacing, we replaced almost 100% of our consumption.

And so when I think about that kind of additional resource gain combining that across the 2 company asset base, you already had third-party estimates pushing our inventory well beyond 10 years. I got to imagine that as we see learnings, as Clay mentioned, from better staggering, from better landing, completion design, but also as we see lower costs, we're going to see that same trend of the 2 companies.

Got it. And then just given the significantly larger pro forma asset base and stronger balance sheet, is this opening up new investment opportunities and doors for you guys? Do you see -- foresee more of these kind of earlier-stage investments in companies like Fervo or WaterBridge? Or do you want to get more integrated, build your own midstream infrastructure, look at long-cycle exploration opportunities? Clay, any thoughts there would be great.

Yes. Thanks for that question, Josh. I think that's just kind of part of our DNA. I mean we got a bunch of entrepreneurs around here. And I think what is really awesome is when we really get aligned on what winning looks like. We've done this work, Solo Devon, over the last 6 quarters or so with our Board. And it was a real magical moment. Last year, the September strategy session, we walked out really kind of understanding what long-term success really looks like. And I think it was so empowering for all the folks around the company that are just thinking about kind of these amending and extending the opportunity set that we have above and beyond just straight drilling additional wells.

While that's always going to be our core business, I'm really excited about how do we think about leveraging the knowledge, the position, the scale, the footprint that we have and really turning additional opportunities. Part of the go-forward, Tom Hellman is going to lead a lot of that effort for us. And it is to think about the firepower that we're going to have, the combined skills that the company is going to bring together, there's definitely more to come. And I think it really helps the longer-term investors think about Devon's value longer term and the sustainability of our ability to hold on to this free cash flow. So I think it's all positive and really excited about where this could evolve over time.

Your next question comes from the line of Phillip Jungwirth of BMO.

And first, congrats on achieving the $1 billion business optimization savings, which some of us were skeptical of. But on -- coming back to the AI discussion, I was hoping you could give more color around the fully autonomous artificial lift optimization, just how to think about this relative to gas lift or ESP or basin specific? And any estimate on how much you think this is improving run time, which is obviously very important at current oil price?

Yes. Phil, first of all, thanks for the acknowledgment on the business optimization. I can tell you there were a lot of skeptics. You weren't the only one and rightfully so. I mean this was something that we were going to create a sustainable $1 billion of incremental value kind of out of thin air. We didn't have a transaction to lean on. It was just a few of us changing offices and sitting in different seats. And -- but I knew the organization had it. I just felt like there was just kind of this untapped resource. I talked about it in my prepared remarks about this moving from a project to more like a cultural norm and it goes back to this hunger for data, like how do we not just compare against ourselves, the best in the business.

And maybe it's not even the best in the business, maybe it's the best in any business. How do we think about that next incremental step. And then the power of technology and really doing something with that data, it's so infectious around the organization. So I'm incredibly excited and I couldn't be more proud of the organization's achievement on that. So first of all, thank you for that acknowledgment.

I'm going to turn to John and just see specifically on the artificial lift because you may not -- maybe the audience doesn't know this, but essentially every well in all of our companies are on some form of artificial lift. We've started with gas lift as a primary opportunity. But I can tell you this extends to every other form of artificial lift as well.

Anyway, let me turn it to John. He can add additional color.

Yes. I think Clay did a good job of providing color in his earlier remarks. Extremely proud of the Smart gas lift program. So we're using smart AI models there to develop a physics-based calculation to optimize gas lift injection rates. That's on a closed-loop system. It's going directly to the wells, and we piloted this back in 2025.

And to your question on uplift, we saw about a 2% to 3% uplift. We've now moved into full implementation in the Delaware Basin. We're over 850 wells at this point in time, and we've seen uplift that is in excess of what we saw in the pilot phase. We are on our way to 1,500 wells across the portfolio. I don't want to give a specific number on uplift just yet.

I just want to say it's better than what we saw in the pilot phase because it's early. But we're already taking similar types of technology, meaning AI-derived models to look at other forms of artificial lift that you mentioned. We're looking at ESPs and rod pumps at this point in time. Those models that we've derived are looking at the wells. They're calculating what should be the optimal production rate for those wells. Right now, we're in the pilot phase. We're looking at subsets of wells, but we're identifying wells that may be producing below their optimal injection rates.

What that's leading to is some actionable insights for our engineers. We're going out. We're testing these insights, and we're already seeing production uplift. And so much like the Smart gas lift program, these are other programs that we're going to be able to scale throughout our portfolio. Smart gas lift has been massive success for us, and I'm looking forward to being able to roll these types of programs out as well.

That's great. And then I also had a question on cash taxes, but it's more as it relates to the portfolio review process. I know you've been buying and selling assets at Devon for over 55 years, but probably never generated as much free cash flow with Coterra in a similar position. So just wondering if there's any ability to shield taxable gains for the pro forma company? Or is this just something that's going to have to be factored in and overcome in any value creation analysis?

Yes, Phil, again, we've got to go away and do the work to give you a more definitive answer. But without question, we're going to evaluate to the extent that we do land on executing on some divestitures, we'll absolutely be evaluating that all on an after-tax basis. And as you point out, some of the assets that we hold in the portfolio today certainly have a low basis.

So we'll have to be thoughtful about how we structure those transactions and be creative, hopefully, as to how we work through those transactions and structure them appropriately to maximize the free cash flow. But we'll absolutely be looking at all that on an after-tax net present value basis. We'll have the opportunity to look at different exchanges that we might do and even some JVs where it makes sense to try to minimize the impact of that as we work through it.

Your next question comes from the line of John Freeman of Raymond James.

Just following up on the prior discussion on sort of the AI benefits on the artificial lift side and then tying that into the earlier discussion on synergies. When I kind of use like the last 12 months of what you all achieved on the business optimization side is kind of a road map on the synergies. When I look at the business optimization, there were certain buckets that got realized really quickly, obviously, the corporate overhead, the commercial opportunities and then the bucket that took the longest to ultimately get realized was the production optimization.

So when I look at the buckets that I've got on Slide 9 for the synergy capture, the discussion you all just had on kind of the AI artificial lift side. Am I thinking about it right, that now that you've got the benefit of that, that you didn't have day 1 when you're doing the business optimization that, that bucket that took the longest in the optimization side maybe doesn't have to take as long when I'm looking at kind of the synergy buckets here?

Yes. John, I appreciate the question. And you're exactly right. Some of these will be early wins. Production is notoriously just kind of one of those slower burning opportunities. You're talking about relatively small wins on hundreds or maybe thousands of wells, and that takes time to kind of work in. The great news is we've been doing the work. We've kind of got the flywheel effect going. We've been very methodical and thoughtful in how we've built towards this. So the synergy $1 billion will benefit from the work that we've done to date. And so more to come.

I might just turn to Trey and just see there's so many other things exciting on the AI front from that category. And then, of course, Trey is also co-leading the integration. And so he has a very great -- very insightful purview into the synergy goals as well.

I appreciate the question, John. I think you're asking the right things on this one. One of the outcomes that I'm really optimistic about is that the tailwinds that we're seeing on business optimization will carry through the synergy work that we have ongoing, specifically the production items, the things like what John mentioned with Smart gas lift as well as another collection of work streams. Clay has mentioned it a few times now, but that process that we've built around which ideas become work streams that we track and measure and push forward, what are the AI and technology data-driven solutions that work. We're going to continue to push all of that forward with our structure. We've built a culture around it. So we're really, really excited about that.

The other thing that we haven't mentioned yet that I would share is we've learned over the last year what we think our investors and our analysts care about and how we can keep all of you updated as we make progress on these things and how we categorize it and we communicate it in a way that's transparent, and we're going to continue to do that going forward as well. And so we're, yes, 100% excited about the tailwinds that we're carrying on the production side, but also just the flywheel that we've built in all of these categories, I think, are going to set us up really well.

And then this was another really active quarter on the ground game side, especially in the Delaware Basin. Should we assume that that's going to remain pretty robust as you all work hard to kind of complement both companies' positions in the Delaware?

Yes, John, this is John. Yes, you should assume that, that's going to remain fairly robust. We've been very successful with our ground game. I think you saw -- pardon me, you saw in our materials since last year, we've added well over 100 net locations in predominantly the Delaware Basin with our ground game. Q1, we had another great success. I think you saw our acquisition capital of roughly $150 million. That was 90% Delaware Basin. That was not only success in the January lease sale, but a lot of really good knife fighting behind the scenes and good work by the land team. So it's been an instrumental part of our business, and you can expect us to remain very active on that front.

Your next question comes from the line of Betty Jiang of Barclays.

Actually, just -- I have a follow-up on the buyback. Clay, could you speak to the logistics of having a new buyback authorized under the new Board? And you alluded to in the prepared remarks that you could go beyond the legacy level. Could we see a catch-up on the buyback going forward just to make whole on the repurchases that would have happened by the stand-alone -- the 2 stand-alone companies?

Yes. That's -- I think that's one way to look at it, but I wouldn't presume that we're trying to make up for lost time on any specific numbers. When we get the Board authorization of the new Board, which is going to be imminent, then we will be able to communicate that, and we will get to work on a stand-alone go forward. How do we think about this, what's the right opportunity. Obviously, we had a cadence before. Coterra had a cadence before. How do we combine that and think about the best approach. There's an art and science to share buybacks, but I think there's a real excitement from both sides of the legacy teams that we have a real opportunity to return shareholder value with a tremendous amount of free cash flow and then leveraging the opportunity to buy back material shares.

That makes sense. And a follow-up on target debt levels. The combined entity is going to generate a lot of free cash flow, and we covered that earlier. But just thinking about how you view the optimal debt level going forward? Would you ever want to be at a level that's net zero net debt? Or how do you think about the right leverage at a mid-cycle price level?

Yes, Betty, you're on the track of probably the most common debates we've gotten in with our Board over the years on how is the best way to return shareholder value, dividends, share repurchases and then, of course, debt as well. I certainly don't want to jump in front of the important conversations we're going to have with the new combined Board. But I think you're hitting around on the right opportunities. All of these are -- will be evaluated when we think about the incredible free cash flow of the combined entity, and I look forward to updating everyone once we get alignment on the go-forward plan.

Jeff, do you have any other thoughts along those lines?

No. I would say, Betty, I think both companies historically have been -- both had phenomenal balance sheets, a lot of strength, a lot of -- both investment grade, creates a lot of flexibility for the company. And I think investors should expect that to continue as we go forward. As Clay said, we've got to do some work with the Board just to do the math and get aligned. But I expect you'll see a philosophy on both the share repurchase program and the balance sheet that's pretty consistent with what you saw from each of the companies on a stand-alone basis historically.

Great. That makes sense. Very much look forward to the pro forma update.

Your next question comes from Doug Leggate of Wolfe Research.

Gosh, you had to took me on right after the debt buyback discussion, didn't you?

Totally my bad. You can push that one on Betty.

So I've got two questions, neither of which you'll probably be able to answer, Clay, but I'm going to have a go anyway. So you talked about the number of initiatives that you've already identified. Obviously, it's an upside to the synergy target question. My question is, have you been able to get under the hood on the combined company and Coterra's portfolio assets and so on, given that the merger has not closed yet. And therefore, how -- what's the veracity to which you've been able to define that $1 billion target versus the number of opportunities that you mentioned in your prepared remarks? Just trying to get a feel for how -- I don't want to say conservative and lead you down that road, but it sounds to me that if you haven't been under the hood, how do you think about the risk of that $1 billion synergy?

Yes. Thanks for the question, Doug. And I can add some color on that. Look, there is a -- we have moved aggressively. I don't know if it's -- if everyone kind of sees this, but for a combined $70 billion company to do a sign to close in 3 months is moving with incredible, incredible speed. At the same time, we've been incredibly disciplined on what we can and can't do. And there's very strict rules around what we could and couldn't share. There's an interesting little ability to use something called a clean room where we can exchange certain data with third parties, and we've done some things like that.

But we've been able to exchange a certain amount to now, okay? We have to work a lot of this independently. And of course, even to get to the merger agreement and get the deal signed, both teams needed to work this and understand the why of why their shareholders are going to benefit from this. So we work this independently. Between sign and close, we've been able to share some data and get closer and closer by leveraging, like I said, third parties and the ability to stay well inside the lines, but make sure that we are working together closer and closer. And then, obviously, starting tomorrow, it's full speed ahead, take off all the shackles and we'll find additional opportunities.

What I would tell you is we've been able to work close enough together where I feel very confident in the outcome. I am not raising the number on the $1 billion. I'm not accelerating the time line. What I just want to give the investors confidence is -- confidence in is when we say $1 billion by the end of next year, we feel confident and we will be able to deliver much like we delivered on our last business optimization goal. The difference is the flywheel effect that Trey mentioned earlier, we already have kind of a running start on some of these opportunities. And so it just gives me even greater confidence that we'll be able to achieve this combination. Certainly, we see opportunities in lots of different categories. But when we really unleash the combined organization without the restraints of we can't talk about all of these long list of things, it will be even that much more exciting and unlocking of value.

So we feel really good about it. More to come. And as Trey mentioned, we're going to be incredibly disciplined each quarter on updating you, holding ourselves accountable and as you've done, hold us accountable to delivering on these numbers.

I thought I'd give it a go. My follow-up is probably a question you can't answer either, but I'm going to give this a go as well. And I'm going to speak directly and perhaps bluntly about the reason Coterra succumbed to external pressure. The mismatch with the gas and the oil assets, the mismatch with the Marcellus. I know the Board has to review this, but we all saw the letter from Kimmeridge. Where do you stand on the portfolio mix? Do you agree or disagree that having a skewed mix towards gas makes you -- has risks in terms of confusing investors?

Well, thanks for the question. And while I won't talk about any specific investor, we get investor feedback, as you would imagine, all day, every day from every angle. What I can tell you is I'm excited about the combination. Two of the 3 basins have significant overlap from the Coterra side. We're seeing some of these synergies, these opportunities to make those assets better certainly, then we have some other assets that either were Solo Devon or Solo Coterra. And all of those, as I said earlier, they need to earn their seat at the table.

And I do not want to be presumptive. I am not presumptive on which assets will be able to compete or not. And I think that's absolutely the right approach. And we're going to go through that with thoroughness, diligence, swiftness to evaluate all of those options. And certainly, part of the evaluation is how do investors -- what do investors want from us? Again, that's not a that's investors very, very plural, not singular investor because there's lots of different views out there. And obviously, not just trying to answer the question du jour, but thinking about investor sentiment that can stand the test of time. What are investors really going to be excited about 6 months, 12 months, 2 years, 4 years from now, those are the things that we really try and really goal seek towards, and that's the hard conversations that we're going to have, again, with the new management team and certainly with the Board going forward. So excited about that work.

And then as we think about -- it's not just solving for a specific geography. We're really thinking about those things that I pointed to earlier, capital efficiency, inventory depth, free cash flow and then how does it all fit together. Don't underestimate what applying $1 billion of synergies could mean to one asset or another. And so -- and when we think about the skill set that we have, how do we unlock additional potential, that all needs to be thoroughly evaluated. And that will come. Believe me, we are moving fast, fast, fast on this, and we're not going to slow down, but it is the right thing to do to make sure that we are very thoughtful and that we make the right decisions before we try and show our hands on which way we're going to go on any of these important considerations.

Your final question comes from the line of Kevin MacCurdy of Pickering Energy Partners.

Clay, I'd be interested in your take on the macro environment here given the supply disruption. And maybe if you'd care to comment on it, what signals you're looking for that would drive you to contemplate more than a maintenance program?

Yes. It's a great question, Kevin. I think about the -- historically, we've said on the call, we think the world is well supplied in oil. This is circa 2 or 3 quarters ago. We had OPEC still bringing barrels back on. We're watching demand from Asia, from Europe, from the U.S. We're trying to really watch at a macro level how that supply and demand is really kind of lining up. Certainly, over the last couple of months, that dynamic has changed very significantly. I think it's too early to call kind of the end or how this thing resolves itself.

Meanwhile, there's a lot of barrels off the market. We're watching international storage levels come down over time. And that certainly influences where we think the back end of the curve, one is trading, but also where it normally should be. We'll continue to watch this, and we talked about before, we don't steer the ship with the front end of the curve. Oil price as we see it today, can bounce around $5, $10 at a time. And that can just -- that can be an ill-sought of trying to optimize on that. We're watching the back end of the curve. We're watching the macro fundamentals. What I would tell you is, from our view, things are evolving, and we'll continue to watch that very closely.

Okay. And then maybe shifting gears a little bit on oil realizations, they're just a little bit lower this quarter than prior quarters. Any comments on that pricing? And will you see any benefits from the Brent WTI spread that's kind of materialized here across any of your assets going forward?

Yes, you bet. I want to brag again on our marketing team a little bit. They've done a really phenomenal job with our oil export program and kind of the back half of the first quarter, we started to see some real benefit of that with getting some premiums to what we could have achieved domestically via the export program. And I expect that to be the same case in the second quarter. We should see strength in the second quarter on a relative basis as a result of that export program. So kudos to the team. They've been really thoughtful as we built that out over the last couple of years, and it's really starting to pay dividends, particularly in the volatile environment that Clay just described.

I will now pass the call back to Mr. Chris Carr for closing remarks.

Thank you for your interest in Devon today. If there are any further questions, please reach out to the Investor Relations team. Have a good day. Thanks.

This concludes today's call. Thank you for attending. You may now disconnect.

Welcome to Devon Energy's Fourth Quarter 2025 Conference Call. [Operator Instructions] This call is being recorded.

I'd now like to turn the call over to Mr. Chris Carr, Director of Investor Relations. You may begin.

Good morning, and thank you for joining us on the call today. Last night, we issued Devon's Fourth Quarter and Year-end 2025 earnings release and presentation materials. Throughout the call today, we will make references 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, President and Chief Executive Officer; Jeff Ritenour, our Chief Financial Officer; John Raines, SVP, Asset Management; Tom Hellman, SVP, E&P Operations; and Trey Lowe, SVP and Chief Technology Officer.

As a reminder, this conference call will include forward-looking statements 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.

With that, I'll turn the call over to Clay.

Thank you, Chris. Good morning, everyone, and thanks for joining us. Today, we'll focus on Devon's strong fourth quarter and full year 2025 results. Before diving into those very impressive results, I also want to cover the highlights of our recently announced merger with Coterra Energy. I'm incredibly excited about this merger and what it means for our shareholders. The combination of these 2 outstanding companies creates a clear path to superior value creation that neither company could achieve independently.

The merger unites complementary portfolios with substantial and overlapping positions across the best U.S. shale basins. At the heart of this combined portfolio is a world-class position in the Delaware Basin, which will generate more than half of our total production and cash flow, backed by a decade-plus of top-tier inventory. Beyond the Delaware, the geographic diversity and balanced commodity mix provides strength throughout the volatility of the commodity price cycle.

The scale and operational overlap of our combined platform will unlock substantial value. By implementing best practices, optimizing our cost structure and maximizing our infrastructure utilization, we will capture significant synergies. In total, we expect to deliver $1 billion in annual pretax run rate synergies by year-end ' 27. To be clear, these synergy targets are incremental to our business optimization program and reflect true operational and efficiency gains.

And importantly, if there are any net reduction in activity levels, these capital savings will be incremental to our announced $1 billion target. I want to emphasize that we have a strong record of delivering on these business optimization wins. Our proven framework and experience will be leveraged to identify, deliver and communicate these merger synergies. Another critical benefit to this transaction is the enhanced free cash flow generation from the pro forma company.

With this uplift, we plan to accelerate capital returns to shareholders through higher dividends and expect a significant new share repurchase authorization to deliver cash returns consistent with best-in-class peers. Bottom line, this transformative merger checks all the boxes and positions us to be an industry leader that delivers differentiated value to investors. With that strategic perspective, let's now turn back to Devon's impressive fourth quarter and full year 2025 results, which demonstrate the strong operational and financial momentum that we're bringing to this combination.

Let's turn to Slide 4 for a deeper look on how our disciplined execution delivered another quarter of exceptional results. As you can see displayed on the left, beating on production, operating cost and capital results in an impressive free cash flow for Q4. Our production optimization efforts drove oil above the top end of the guide, fueled by strong new well performance and outstanding base production management. Operating costs significantly improved from the start of the year, reflecting enhanced reliability and relentless operational efficiency.

Capital spending finished 4% better than guidance as we continue to capture drilling and completion efficiencies through advanced technology and a culture of continuous improvement. Combined, these efforts translated into $700 million of free cash flow, positioning us to return substantial value to shareholders. I want to emphasize that these results are not just one-off isolated wins, they are direct outcomes of disciplined execution across our entire portfolio. This consistency is evident in our full year performance and reflects the effectiveness of both our strategy and our team.

I also want to quickly highlight our impressive reserve performance for 2025. Our capital program achieved a reserve replacement rate of 193% of production at an F&D cost of just over $6 per BOE. While a single year of reserves booking should never be viewed as a sole measure of success, this result provides compelling evidence that the quality and sustainability of our advantaged multi-basin portfolio.

Turning to Slide 5. You can see how our focus on operational excellence and disciplined execution culminated in outstanding full year 2025 results. Our track record speaks for itself. Quarter-after-quarter, we drove meaningful improvements to our outlook. Since our preliminary guidance, we delivered an incremental 9,000 barrels of oil per day while reducing capital spend by nearly $500 million. These results reflect a sustained commitment to margin enhancement, technology adoption and continuous improvement across our entire organization.

The impact is clear. Capital efficiency improved by more than 15% from our preliminary 2025 outlook, enabling us to extract more value from every dollar invested. Turning to Slide 6. As we've shown many times in the past, our capital efficiency results rank consistently among the very best in the industry. On the left-hand side of the slide, our well productivity stands more than 20% above peer average. On the right side, Devon's capital efficiency outperforms industry by 13%. Together, leading well productivity and capital efficiency translate directly into the strong free cash flow generation that powers our cash return framework.

Turning to Slide 7. Another critical driver of Devon's strong performance is our business optimization program. In less than a year, we have captured 85% of our $1 billion target, and we are firmly on track to achieve the remaining savings during 2026. As an aside, I think it's important to remind you that this goal is focused on sustainable free cash flow. The progress of this goal will manifest in multiples of this dollar amount to our enterprise value.

This outlook of continued progress is supported by several key catalysts. The planned term loan repayment in the third quarter will deliver $50 million in annual interest savings. At the same time, we are accelerating the implementation of AI-enabled artificial lift optimization and advanced analytics well beyond the pilot programs that we've mentioned on prior calls. Additional benefits will come from operating cost improvements through condition-based maintenance and enhanced drilling and completion cycle times.

Beyond these initiatives, we have more than 100 active work streams focused on driving sustained base production gains while reducing the capital required for our maintenance programs. Most importantly, this initiative has fundamentally transformed how we operate. Continuous improvement and the accountability are embedded into our culture, empowering our teams to deliver sustainable value well beyond the initial target. Business optimization is no longer a program with an end date, it has become core to how Devon operates every single day.

Turning to Slide 8. As we discussed last quarter, parallel to driving incremental value out of the day-to-day business, we are also regularly evaluating opportunities to rationalize our portfolio to enhance shareholder value. Throughout 2025, we executed on strategic transitions -- transactions via midstream, marketing and leasing that collectively delivered over $1 billion of value uplift to our enterprise NAV.

To be clear, these gains are in addition to the improvements from our business optimization initiative. New this quarter, I wanted to highlight our continued investment in Fervo Energy. We recently participated in their Series E funding round, bringing our investment to approximately 15% in this innovative geothermal energy company. Fervo is pioneering next-generation geothermal technology, and we see compelling strategic and financial opportunities in this partnership.

It leverages our core skills of geoscience expertise, land leasing, horizontal drilling and completions and subsurface production and recovery skills while positioning Devon in a power-generating sector with significant growth potential.

With that, I'll now hand the call over to Jeff.

Thanks, Clay. Turning to Slide 9. Devon delivered another year of strong financial results. In 2025, we generated $3.1 billion in free cash flow, demonstrating the strength of our asset base and the effectiveness of our operational execution. This robust free cash flow enabled us to return $2.2 billion to shareholders through dividends, share buybacks and debt retirement. We remain committed to growing our fixed dividend through the cycle. In 2025, we increased our quarterly dividend by 9% to $0.24 per share. Following the expected close of the Devon and Coterra merger and pending Board approval, we plan to raise our fixed quarterly dividend by another 31%, reflecting our strong confidence in the combined company's ability to capture synergies and to deliver an enhanced cash return profile to shareholders.

We're also focused on opportunistically reducing our share count and returning value through buybacks. Over the past year, we've reduced our shares outstanding by approximately 5% through disciplined repurchases. Following the merger close and with Board approval, we anticipate a new share repurchase authorization of more than $5 billion, providing significant capacity to deliver strong per share growth over the next several years.

In addition to dividends and buybacks, we also possess an investment-grade balance sheet and excellent liquidity. We ended the year with $1.4 billion in cash and a net debt-to-EBITDA ratio of less than 1 turn. This financial strength provides flexibility to invest in high-returning opportunities while consistently returning significant capital to our shareholders.

Lastly, I want to touch on our outlook. Looking specifically at the first quarter, we expect production to average around 830,000 BOE per day. This guidance reflects approximately 10,000 BOE per day of weather-related downtime in January. Even with this temporary disruption, our previously provided full year 2026 guidance remains unchanged. Upon the close of the merger, we plan to provide updated guidance for the combined entity.

Before we open the call to questions, I want to note that today, we would like to focus the Q&A on Devon's stand-alone results and outlook. As you can appreciate, we are limited in what we can discuss regarding the pending merger at this time. We expect to file our S-4 registration statement in the coming weeks, which will provide additional details on the transaction.

With that, operator, we'll take our first question. [Operator Instructions].

[Operator Instructions] Our first question comes from Neil Mehta with Goldman Sachs.

I'll try to state on the stand-alone business here and just your perspective on the business optimization and where you are relative to the $1 billion of the pretax target. And what are the key milestones you're focused on the first half of 2026? Of the buckets, which is the one that you feel you're most focused on as a management team right now?

Yes. Thanks for the question, Neil. We're really excited about the progress. We launched this thing a year ago, and I can tell you it was a bit aspirational as we thought about how do we come up with all of these numbers. We knew that there was so much more potential to unlock. But we didn't have a line-by-line attribution to each individual piece. And I can tell you, it's been really exciting to see the organization just really unlock around this. As we've talked about before, it's been a very heavy leaning on technology. I think we're just scratching the surface on some of that real potential.

But as we mentioned in the prepared remarks, 1 year in, we're now at 85%. We have clear line of sight to being able to achieve the full $1 billion. And I think importantly, as we think about the skill set and the culture around identification, tracking and communicating, I think that really translates into our next challenge going forward, which we're incredibly excited about. I might ask Trey just to give some additional thoughts as he's a little closer to this on a day-to-day basis.

I appreciate the question, Neil. We -- Clay mentioned this in our opening comments that we now are up over 100 work streams that we're tracking related to business optimization. We have a ton of confidence in what we see coming forward. Over the last few quarters, we've talked a lot about what we're doing in the production space, specifically with trials around gas lift optimization and a few other topics.

What I can confidently say and what we're really excited about at the team level is a lot of the investments we've made in artificial intelligence and in the platforms that we've built over the last year are really coming to fruition in the production space. We've seen those advantages already in the drilling results that we've had, but we're going to start to see over first quarter and second quarter a lot of the projects that we trialed in the second half of 2025 start to scale.

And so as we scale these things, which all of these technologies are very scalable. We'll do that across the entire organization. We're going to see a lot of benefits flow through on the production side, ultimately resulting in kind of our ability to lower capital long term, and we'll see improvements on the LOE.

Our next question comes from Neil Dingmann with William Blair.

My question is on the Delaware position, I guess, whether it's stand-alone or pro forma. I'm just wondering, with a larger upcoming position, I'm just wondering, is there plans to target even longer laterals and potentially upspace the wells to boost results? And then I'm just wondering, will you continue to be as active on the ground game there as you've been in recent months.

Yes. Thanks for the question, Neil. The Delaware Basin is just an incredible piece of business, stack of rocks and a great place to work. And so incredibly excited about our current position and the pro forma position as well. What I would tell you is the truism of the best place to find oil is where you found oil before continues to hold true. We think about additional landing zones. We think about innovative technology.

We think about improving recovery. We think about flattening our base decline, lowering our downtime. All of these mechanisms that we are so excited about absolutely translate into this incredible position that we have in the Delaware Basin. As we go forward, you bet, we're going to be in a very strong financial position to be opportunistic as we have been. I think that continues in a position of strength, how we think about those opportunities, I think we'll be in a great position to maximize those opportunities. Thanks for the question.

The next question comes from Doug Leggate with Wolfe Research.

Clay, you're making it hard for us. We all want to ask questions about the merger and all that stuff, but we'll try and behave ourselves and not do that this morning. I do want to ask question about -- Yes. Well, I don't want to waste my question on something you're not going to answer, so I'm going to try something else. Exploration, Clay, you and I have talked about this before about the -- perhaps the loss of collective capability on some of your peers.

We're seeing speculation or perhaps not so much speculation that you guys are now looking internationally. I wonder if you could just frame for us whether it's conventional or unconventional, domestic or international, what is the role of exploration in Devon? And if I may ask you to opine just on a broader issue, what does this say about the maturity of U.S. shale if indeed you are pursuing opportunities elsewhere?

Yes, that's a great question, Doug. I'm happy to talk about it. When I think about it, internally, we have some terminology we use around pillars. Pillar 1 is make Devon a better Devon. And that's clearly the focus around this business optimization, all of the work that we're doing with technology, leaning in efficiency that just translates into everything else that we do.

And importantly, buys us the credibility to be able to consider things above and beyond just making Devon a better Devon. The pillar 2 is a little bit more organic in nature. And these are things that we mentioned Fervo on this call. We think about what the potential is from there. We've talked about exploration. We've clearly been interested in understanding the potential, not just here in the U.S. but around the globe. But I would tell you, those are long-dated investments, long-dated relationship builds, things that we need to evaluate over time. And as we know, the best time to evaluate those are when you're in an incredible position of strength.

And so I think about our portfolio today, the free cash flow that we just displayed in full year '25 as I look forward to our capabilities kind of going forward, this is exactly the right time for us to really think about leveraging, not just our financial strength, but our operational strength. And so when I think about the skills that we have and really exporting that or at least leveraging that into other opportunities.

These things can be multiple years in the making. What we want to make sure that we are in position is that, one, we really objectively understand the skills that we currently have, how we evolve those over time, where business opportunities are in adjacent businesses or businesses that look slightly different than what we do today, and then really hunt for those opportunities where those kind of that Venn diagram overlaps and be in a ready position to be able to capture those opportunities, albeit most of those will evolve over time, but be ready to capture those and be positioned for that opportunity when those do come up.

What I would tell you is, please don't mistake any work that we're doing for next decade opportunities to conflate anything of a lack of confidence in the near term. The confidence in the near term is exactly why we need to be doing things to think about the next decade for Devon and well beyond the positions that we're in today. Again, from an opportunity, a position of strength, that's exactly what we're doing, continuing to refine the skills that we have, think about things creative and beyond our current footprint and then be ready for when those stars do align that we can jump right on them.

Can you confirm the Kuwait interest, Clay?

Yes. What I would tell you is we have explored interest in a lot of places. That's a long, long way from putting material dollars to work. What I would tell you is to really understand the potential that we have. For example, the work that we're doing in resource plays domestically, clearly, there will be opportunities internationally. For us to understand and evaluate where that potentially could fit in our long-term horizons, we absolutely need to be engaged in those conversations, getting our name out there, participating in that so that we can understand the surface challenges, the kind of above-ground risks and how do we quantify that and put it in context to other opportunities that we have.

So while I'll avoid commenting on any one particular deal because I think it's way too early for any of that, I can confirm that we are exploring a lot of different ideas and opportunities so that, one, we have a better kind of relative positioning and an understanding of what will absolutely fit us best for our longer-term horizons. Thanks for the question, Doug.

The next question comes from Kelly Akamine with Bank of America.

My question is on cash OpEx. I'm noticing that LOE plus GP&T on the full year guide is lower than 1Q '26. Can you kind of talk about the cadence of the lower cost there and whether it's reflective of the GP&T optimization efforts on the NGL front?

Clay, this is John. You cut out a little bit, so jump in if I'm not answering your question. But just for the cadence on OpEx for the full year, we've continued to make consistent improvements in our workover optimization. We've consistently reduced our failure rates. That really contributed to a lot of the drop in LOE plus GP&T for the full year. Going into Q4, we actually saw some tailwinds on some recurring items. Trey mentioned and Clay mentioned in his comments, the condition-based maintenance approach. We're very early innings in that. We're starting to scale that.

We started changing some of our maintenance approaches in the Delaware Basin, and we've already seen some costs come out of the system. And so that contributed to the Q4 number. From a power standpoint, we've also energized 2 microgrids in the Delaware Basin. With that, we're able to release a lot of site-specific generation. So just good blocking and tackling on the LOE front.

About the time you cut out, I think you were talking about Q1, we do see an uptick there on LOE plus GP&T. Really, what's driving that is twofold. One, it's a little bit of a soft spot in our volumes for the year. As Jeff mentioned, we had the weather downtime that hit us in Q1. But then very specifically, we've got line of sight to just some higher workover activity in the Williston that was mainly weather-driven and then some workover activity in the Eagle Ford that was driven, or is driven by some well cleanouts. On the GP&T front, you did see the drop-off in Q4, and that is absolutely related to one of our new gathering and processing contracts going effective in the Delaware Basin. And so that's at a much lower rate, and you're seeing that contribute as well.

The next question comes from John Freeman with Raymond James.

Just following up on the last question on the OpEx side. It sounded like, Clay, maybe that when you talked about sort of the expanding of the automation of the artificial lift optimization, and I think you said it's sort of above and beyond what you all had contemplated previously. I'm just trying to get a sense, does that mean that there's potential that you all could ultimately exceed that kind of $1 billion target with just sort of whether it's that or some of the other catalysts that you all sort of outlined on Slide 7? I'm just trying to get a sense of what's left to be accomplished for the $1 billion and if there's potential upside based on some of this.

Yes, John, what I was really just trying to articulate and frame is that while we've achieved 85%, we have a great deal of confidence in being able to achieve the full $1 billion. More to come on that particular topic, but that will be something that will unfold in the coming quarters. Just again, reiterating, we haven't changed the $1 billion target. I think what has changed is just kind of our approach that this is kind of how we work going forward.

And there's so many smaller wins that just don't make the headlines that I'm equally excited about. I see this kind of contagion around the organization in all parts of the company really contributing and thinking differently about how do they get their share of the contribution to this sustained free cash flow win.

And to me, that's just a winning culture. So I really feel confident in the $1 billion, and I feel equally confident that there's more to come in regards to just the change in culture and innovativeness that we're leaning towards.

The next question comes from Arun Jayaram with JPMorgan.

Clay, I was wondering if you could just maybe provide some insights around the 2026 program. You're spending or plan to spend about $3.5 billion upstream. How should we think about kind of capital allocation between regions outside of the Delaware? It looks like today, you're operating about half of your rigs in the Delaware. But how should we think about capital allocation between the Mid-Con, Williston Basin and Eagle Ford, PRB?

Yes. Arun, I would say, directionally, think of it pretty similar to how we have been allocating. Clearly, I don't want to get ahead of myself once we get the deal closed. That will be a first order of business. As I mentioned on the last call, really thinking about those opportunities around capital allocation and stepping up the value creation there.

Understood. And my follow-up is just you guys have had some really good opportunities in terms of portfolio management, thinking about Matterhorn and your investment in Waterbridge. Clay, I was wondering maybe you could elaborate on the ownership position in Fervo Energy. I think Fervo, we saw them at Baker Hughes' recent annual meeting, have some really unique technology in geotherm. But talk about the decision to invest in Fervo and value creation potential for Devon shareholders from that.

Thanks for the question, Arun. This is Trey. I've been a part of the kind of Fervo investment decision since we started at Devon. And honestly, we originally got introduced to the team there through some of our technical contacts on the engineering and geoscience side. Fervo is a pioneer in the space with enhanced geothermal systems, and that basically means they're using horizontal drilling and multistage hydraulic fracturing to build out geothermal systems.

And it looks a lot like what we have led the way on the subsurface interpretation and with how we've characterized, as an example, hydraulic fractures. And so we got to know them on a technical basis originally. Then we met the management team, got to know the founders really well and ultimately started to really see a lot of the things that we liked about what Vrbo was doing and wanted to support them and to better understand that geothermal business. That's led us over the last couple of years to where we are today, where we're now a 15% owner in the business and continue to be really enthusiastic about what they're doing. Operationally, they're having a lot of success. They continue to drive well costs down, and we've been supporting them with technical support throughout that process to help make their business better.

The next question comes from Phillip Jungwirth with BMO.

I'll try not to ask this in relation to the merger, but Jeff will be heading up commercial, which has become an increasingly important role for large E&Ps. So the question is more just how do you see the commercial opportunity for Devon stand-alone? And where is the current focus now for the company?

Well, I think that does kind of venture into an area we probably don't want to spend too much time on, but I can reiterate what we said on the last call. Once we get the company combined, the management team, the new Board, I think it's going to be a really exciting platform to reevaluate, as I just mentioned, some things near term like capital allocation, but also thinking about asset rationalization, thinking about some of these long-term opportunities.

Remember, we're going to have an incredible financial footprint, operational footprint, portfolio. And I think that just really opens up the door to a lot more possibilities. So without getting too far ahead of ourselves, I would just say that the financial footwork, financial foundation is there, and we feel really good about that positioning and really opening the doors to additional opportunities.

The next question comes from Charles Meade with Johnson Rice.

I don't intend to make this a post-deal question, but I acknowledge it may be. But I wondered if you could talk about the dividend, how you chose that new level. It's a big bump. And what the thought process is there to arrive at 31.5% is the right number?

Yes. I think the -- it's a big bump from our side from the Coterra side. It's basically on par with what they have been doing. And so I think that was kind of the foundation. Now obviously, again, this is all presupposing a little bit on what the new pro forma Board will approve, but we've guided to is that $0.315, which again is a nice bump on our side.

And then in combination, we also project that the Board will approve a very substantial share repurchase program. I think that gives us a lot of latitude in addition to being able to pay down some debt that's coming due, I think just gives us a great framework of opportunities to return this very significant free cash flow directly back to shareholders.

The next question comes from Paul Cheng with Scotiabank.

The fourth quarter Delaware result is really very impressive. I mean you have lesser number of TEU and then production is actually higher than expected. Just want to see that how repeatable or that there's some one-off item that we should be aware such as the timing of when the well come on stream? Anything that you can share on that? And also that the outperformance, how much is really coming from the new well and how much is on the base operation doing better?

Thanks for the question, Paul, because we did have an outstanding fourth quarter. That's on the back of quarter-after-quarter performance. There is a kind of an overall downdraft in cost structure. That's efficiency, that's technology, there's also an updraft in productivity. And so thinking about how do we get more out of these precious resources that we have in the portfolio today.

And what you see in the fourth quarter is that really coming together. While quarter-to-quarter, it's always going to vary just a little bit. I mean you bring on these big pads, just a shift in a couple of weeks from beginning to a little bit later in the quarter can manifest in different kind of near-term ebbs and flows. I would look at the overall quarter-over-quarter progress. And I think that I feel very confident in extending well into '26 and beyond.

I think that is what we're most excited about. This business optimization was really code for how do we all get really hungry and really creative on that incremental value opportunity. I might turn it to John and ask him his thoughts on the balance of new wells versus the base -- the incredible base work that we're doing as well.

Yes. Thanks, Clay. I mean, really, the story is twofold. I mean we did have some help from timing on the wedge. We had 3 incredible programs come on in the fourth quarter. The timing helped, but also the wells all outperformed our internal expectations there. The well mix for us, it changes quarter-to-quarter, but we had a pretty balanced well mix.

These 3 programs, in particular, had a good balance of Wolfcamp B, Bone Spring, but also Wolfcamp A. So all of those things were contributing factors. But Clay is right, we would be remiss not to talk about the base. Throughout the course of 2025, we saw a lot of production optimization through various projects on the base. And all in all, for the full year, the base outperformed by about 5,000 barrels of oil a day. So when you think about that type of contribution on the base, it's almost 2% of the base. That's just a huge part of our business and an exceptional result and exceptional value to the company.

John, what's the underlying base decline rate in the Delaware right now for you guys?

Paul, if you were asking about decline rates, right now, yes, our base decline rates right now in the mid 30% range.

Is that changed from previously? Or that is still the same? I would imagine with your better base operation, your underlying decline rate should be lower or should be less.

Yes. I'd say we've had some tailwinds on the base. The decline rate itself hasn't changed dramatically year-over-year. Now granted, we're, call it, 1 year into a lot of these production optimization projects. What I would tell you is our downtime is significantly lower. Historically, that was in the 7% range. As we go into this year, we're looking at something inside of 5%. So that's really where you're seeing a lot of the base wins show up.

The next question comes from Kevin MacCurdy with Pickering Energy Partners.

I wanted to stick on the Delaware productivity as it was very impressive in 4Q. Is there anything you can comment on the stand-alone 2026 program and how it compares to the 2025 program in terms of the zones you're targeting, the geography and the forecasted productivity?

Yes, great question. I'll hit on that at a high level. So just top line 2025 well productivity. 2026 is going to look very similar to that. We moved more wholesomely into the multi-zone co-development in 2025. We're firmly into that development methodology. So you'll see very consistent well productivity in 2026. When I think about the mix, the one thing I would ask folks to consider is I'm going to talk about the full year, but these things can vary pretty significantly quarter-to-quarter. But as I think about the program, about 90% of our activity is going to be weighted to New Mexico.

When I break that down a little bit further kind of by area, we'll see a little bit of an uptick in Tod this year in the Delaware, it's about 30%. Cotton Draw is about 25%, Stateline is about 15%. And then the balance of that activity is really spread out across the remainder of the Delaware Basin. Zone mix is another thing. We've got a lot of diversity in the zones for 2026, just like we did in 2025. But just to break it down at a high level, we're about 40% Wolfcamp. We're about 45% Bone Spring and about 15% Avalon. So all those things very similar to 2025. And because of that, we're expecting pretty consistent year-over-year well productivity.

Our final question today comes from Matthew Portillo with TPH.

I actually had a question on the Bakken. Looking at the state data, you already have an impressive mix of 3-mile laterals in the development program. As you continue to shift more capital to the Grayson acreage, I was just curious how that mix shift might change for 3- and 4-mile lateral development moving forward and what that might mean for the breakeven of the asset base?

Yes, Matt, great question. I mean when you look back at 2025, admittedly, our lateral lengths were a little bit probably shorter than what we wanted, just given the layout of some of the units that we had last year. So we averaged closer to about a 2-mile lateral in the Williston. As you fast forward into 2026, we're going to average something closer to a 3-mile lateral.

But when you look at the breakout, we are starting to introduce 4-mile laterals into the equation. We're actually drilling our first 4-mile pad right now. So the teams have continued to optimize the program for longer lateral development. And of course, as you go longer, you're enhancing the economics of those programs and the breakevens are coming in pretty significantly.

It looks like we've kind of exhausted the question list. Thanks for your interest today. And if you have further questions, please reach out to the Investor Relations team. Have a good day.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.

Welcome to the Devon Energy and Coterra Energy's Conference Call to discuss the announced merger. [Operator Instructions]

Today's call will include forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially. For more information, please refer to our press release and SEC filings.

I'd now like to turn the call over to Tom Jorden, Chairman, CEO and President of Coterra Energy. Sir, you may begin.

Good morning, everyone. Thank you for joining us as we discuss the exciting news of the transformative merger between Devon Energy and Coterra Energy. To begin, I'll share a few introductory remarks, and then I'll turn it over to Clay Gaspar, President and CEO of Devon Energy, who will walk us through the presentation that highlights the key attributes of the combined company moving forward.

Now to the transaction. The transformational combination of Devon and Coterra creates a powerful new E&P company, one characterized by asset quality, duration, scale, capital efficiency, operational excellence and a relentless emphasis on technology and innovation. The merger creates a bigger company, but importantly, it creates a better company.

With complementary cultures and a deep mutual respect, our combination brings together some of the best talent in our industry to build a new company, a better company and one that exceeds the performance of either of us separately. We become a clear leader in the Delaware Basin, giving us unmatched opportunity to capitalize on our core position.

Both organizations are leaders in the application of technology. Together, the teams will drive industry-leading capital efficiency, optimize capital allocation and enhance financial performance. Devon plus Coterra is the beginning of a new differentiated company. We are excited to begin integrating these 2 fine organizations. Clay will speak to that in detail. With our combined financial discipline, smart capital allocation and a relentless focus on value creation and cost reduction, Devon will be a pacesetter in our sector.

We can never know what the future will bring. There will be challenges both seen and unforeseen. Oil and natural gas markets remained volatile and unpredictable. Commodity and geographic diversity position the company to be flexible and resilient for whatever the future brings. Now as always, flexibility is the coin of the realm. With this merger, Devon is positioned to be flexible and adaptable, more so than any of our peers. This will distinguish us as we move forward.

I want to finish by acknowledging the amazing contributions from both organizations and getting us to this moment today. We share values of technical rigor, financial discipline and a commitment to our shareholders to be the best in the business. I am proud to lead the combined Board as Chairman. Clay, who will lead the organization as President and CEO, is the right person at the right time. Throughout this process, Clay and I have built a strong partnership based upon respect, candor and courage. Although we will have vastly different roles, we will partner in our commitment to Devon becoming the premier large-cap energy company.

With that, I will turn it over to Clay.

Thank you, Tom. I also want to recognize your dedication, open-mindedness and tenacity to get this merger consummated. You've been a fierce advocate for your investors and for your people, and I truly respect that. Thank you for that, and I look forward to working together to achieve the amazing potential that this merger serves up.

With that, good morning to everyone, and thank you for joining us. I'm incredibly excited about this merger and what it means for our shareholders. The combination of these 2 outstanding companies creates a clear path to superior value creation that neither company could achieve independently. Both organizations hold strong asset portfolios anchored by world-class positions in the Delaware Basin. Our teams have been long-standing partners and collaborators and we share a common values-based culture with operational excellence and disciplined capital allocation.

By combining with an at-market all-stock merger, we're creating a stronger company with greater operating scale, enhanced financial flexibility and increased capacity to create shareholder value. I want to recognize that this outcome was made possible by both leadership teams maintaining a singular focus on what is best for our shareholders. I'm profoundly grateful to both Devon and Coterra's teams who tirelessly worked to make this happen. I also want to thank the employees of both companies for their dedication and hard work that has built the strong foundations that we're combining today.

Now let's turn to the presentation, and I'll focus your attention on Slide 2. This merger unites 2 highly competitive portfolios, creating a must-own premier shale operator. But this is more than just about size. Devon and Coterra bring together substantial and overlapping positions across the best shale basins, creating a portfolio built for durability and designed to deliver top-tier shareholder returns for decades to come.

At the heart of this combined portfolio is our leading position in the Delaware Basin, which generates more than half of our total production and cash flow backed by over a decade of top-tier drilling inventory. Beyond the Delaware, our broader, high-margin Lower 48 portfolio and balanced commodity mix provides resiliency throughout the ups and downs of the commodity cycles. The scale and operational overlap of our combined platform will unlock substantial value. By implementing best practices, optimizing our cost structure and leveraging our infrastructure, we will capture significant synergies. Importantly, we also learned -- we learn hard artificial lift -- we will also lean hard on artificial lift -- excuse me, artificial intelligence and advanced analytics to drive operational excellence in every facet of our business.

In total, we expect to deliver $1 billion in annual pretax synergies by year-end 2027. These synergies on a PV-10 basis represent approximately 20% of the combined market cap and will drive meaningful accretion to both shareholder bases. I will cover this later in more detail, but I want to be clear that we have a track record of delivering on these business optimization opportunities as well as the people and the processes to do it well.

Another critical benefit of this transaction is the enhanced free cash flow generation from the pro forma company. With this uplift, we plan to accelerate capital returns to shareholders through higher dividends and expect a significant new share repurchase authorization to deliver cash returns consistent with the best-in-class peers. It's also worth mentioning that we will realize lower future cost of capital through our improved investment-grade balance sheet and conservative leverage profile. Bottom line, this transformative merger checks all the boxes and positions us to be an industry leader that delivers differentiated value to investors.

Turning to Slide 3, let me walk you through what this combined company looks like. And what I want to emphasize is because it's critical, scale does matter. But it's not big for big's sake. It's value-driven scale that fundamentally changes our competitive capabilities and materially elevates shareholder value. The combination creates one of the largest shale producers in the world with over 1.6 million barrels of oil equivalent per day, and here's why that matters.

Scale of this magnitude unlocks operational and financial advantages that simply aren't available to operators of less scale. It gives us the ability to expand margins through operational efficiencies across our overlapping asset base, optimize our marketing arrangements and infrastructure, enhance our supply chain purchasing power and eliminate corporate redundancies. These are not theoretical benefits. These advantages will generate much more free cash flow from every barrel we produce.

Beyond the advantages of scale, our portfolio delivers both geographic and commodity balance. This enables operational efficiency, allowing us to strategically allocate capital and optimize returns in varying market conditions, driving consistency of results that benefits our shareholders.

Now let me get into what really anchors this combined company, our leading position in the Delaware Basin. Turning to Slide 4. The combination of these 2 strong positions create a premier Delaware Basin portfolio. As you can see on the map, together, we have an extensive geographic footprint across Southeast New Mexico and Texas, with approximately 750,000 net acres of stacked pay resource concentrated in the economic core of the play. This vast leasehold position provides us tremendous operational flexibility and immediate opportunities to drive down well cost and to refine capital allocation. The overlap also allows us to better utilize our existing infrastructure, including our water handling system, processing capacity and firm takeaway, which will drive further cost efficiencies.

On a pro forma basis, our production in this world-class basin is substantial with current volumes exceeding 860,000 barrels a day of oil equivalent, representing more than half of our total production and cash flow generation. This production scale is also complemented by more than a decade of inventory at our current pace of development, providing a strong foundation for sustained long-term value creation.

On Slide 5, let's take a closer look at the unmatched scale and quality we've established in the Delaware Basin. We now hold one of the industry's deepest inventory with nearly 5,000 gross drilling locations and the highest concentration of sub-$40 breakeven inventory in the sector. As previously mentioned, this positions us with more than 10-year runway of high-return development opportunities at our current activity pace. This industry-leading scale, quality and resource durability in the Delaware Basin creates a massive opportunity for the go-forward company and serves as a cornerstone of this merger's value creation. With the quality of this resource and technical capabilities of our team, we are positioned to deliver substantial top-tier efficiency for the foreseeable future.

Now let's turn to Slide 6. We have another -- we have other high-quality assets that play a crucial role in our free cash flow generation. This multi-basin portfolio delivers top-tier capital efficiency in each basin, strong free cash flow generation and provides capital efficiency to direct the capital to the highest return opportunities.

Additionally, commodity and geographic diversity associated with this portfolio of assets complements our best-in-class Delaware position, giving us multiple avenues to generate cash flow and deliver strong shareholder returns throughout the cycle. Of course, each of these assets will need to compete for capital in the pro forma company. We will remain disciplined and focused, always challenging ourselves to maximize shareholder value through operational excellence as well as in an objective view of asset rationalization.

Turning to Slide 7. With this advanced platform, it's important to highlight that both Devon and Coterra have a long track record of operational excellence. This is clearly evidenced on the production productivity chart on the left side of the slide. This is not cherry-picked data showing just our best wells. This exhibit captures every well for Devon, Coterra, as well as our top peers in the industry sourced from Enverus. The result, our combined performance yields impressive standing in this competitive industry and is more than 20% higher than some of the very best peers in the industry. The consistent outperformance demonstrates both the quality of our resource and the expertise of our teams.

On the capital efficiency front, the chart on the right tells an equally compelling story. Both companies have also consistently delivered top-tier capital efficiency. Both companies are well known for their efficient operations, it's evident of the result of relentless commitment to the excellence across every aspect of our business. By bringing together our teams and best practices, we expect to further enhance this performance and cost efficiencies across our combined portfolio. We have the right assets and a proven track record as low-cost producers, positioning us to continue to deliver industry-leading results and unlock even greater shareholder value in the years ahead.

Moving to Slide 8. Let's focus on synergies, one of the most compelling aspects of this transaction and a key driver of accretion for both sets of shareholders. We are targeting $1 billion in annual pretax synergies by year-end 2027. Importantly, we have identified specific, actionable opportunities with a clear path to capture these benefits, supported by a detailed execution plan. These synergies are anchored in 3 primary areas, and I'll walk through specific initiatives in each.

First, capital optimization will deliver $350 million in annual savings. We have identified opportunities to immediately reallocate capital to enhance efficiency and free cash flow. By leveraging our combined economies of scale, we will achieve sustainable improvements in supply chain cost. Additionally, our complementary assets overlap enables the deployment of longer laterals and proven best practices, resulting in another platform tailwind for the company.

Next, we expect operating margins to improve to generate $350 million in annual savings. By leveraging company -- complementary asset overlap, we will streamline field operations and drive significant cost efficiency gains. Enhanced infrastructure capabilities, particularly in the Delaware Basin, will further expand margins, while integrated technical expertise will optimize production performance across our portfolio. We have also identified significant potential from corporate cost reductions, which are expected to generate $300 million in annual savings by aggressively eliminating redundant expenses and consolidating duplicate functions. In addition, our enhanced credit profile provides opportunities to refine, refinance debt at more favorable rates, further strengthening our flexibility and driving greater shareholder value.

The net present value of these synergies represents approximately 20% of our pro forma market cap. This is a substantial value creation. And because of this all-stock transaction, shareholders of both Devon and Coterra will benefit from these cash flow improvements and accelerated returns that they enable.

And lastly on the slide, let me speak directly to the confidence in our execution. Both Devon and Coterra have established track records of exceeding synergy targets in prior mergers. Devon's recent business optimization program is further proof having delivered substantial cost savings and operational improvements ahead of schedule. Upon close of the transaction, we will have a dedicated integration team led by members of senior leadership focused on target work streams with clear accountability and rigorous tracking mechanisms to ensure delivery. This is not aspirational. We have done it before, and we are fully prepared to do it again.

Turning to Slide 9. Technology and artificial intelligence are foundational to the success of this integration, enabling us to capture synergies and achieve industry-leading operating results. Both Devon and Coterra have been industry leaders deploying AI across the subsurface modeling, drilling and completions and production operations. By combining our complementary technological capabilities and expansive data sets, we create an industry-leading technology platform that accelerates AI deployment across our combined portfolio. This enhanced capability will drive meaningful value through optimized wellbore placement, reduced nonproductive time, improved artificial lift efficiency and faster, more informed capital allocation decisions.

Turning to Slide 10. I want to walk you through the compelling value proposition we've created in this transaction, and explain it why it offers an attractive entry point for investors. Starting on the left, you can see how this merger creates a company with top-tier scale as evidenced by our substantial cash flow generation. This presents a clear opportunity for investors as we trade at a discounted cash flow multiple relative to our peers. As we integrate and deliver results, we expect the market to recognize the enhanced scale, quality and execution capabilities of the combined company.

The chart on the right reinforces this point, illustrating our pro forma free cash flow yield relative to industry peers. The combined company is positioned to deliver a highly competitive free cash flow yield, which will further improve as synergies are realized. This represents an attractive entry point for investors, offering a premium free cash flow yield compared to top-tier peers with similar scale and quality.

Turning to Slide 11. This merger significantly strengthens our ability to return cash to shareholders through a disciplined capital allocation framework that accelerates shareholder returns. We enter the combination from a position of financial strength with $4.4 billion in liquidity, 0.9x net debt to EBITDAX and an estimated reinvestment rate below 50%. The fortress balance sheet, combined with our enhanced free cash flow generation provides us financial flexibility to navigate any market environment while maintaining our commitment to shareholders. We plan to declare a quarterly dividend of $0.315 per share and target consistent dividend growth throughout the cycle. Our synergies are captured -- as our synergies are captured and free cash flow continues to build, we expect a new share repurchase authorization in excess of $5 billion to deliver cash returns to shareholders consistent with best-in-class peers.

To wrap up, let's turn to Slide 12, which summarizes our unique investment proposition. As a premier shale operator, the combined company will have the scale, assets, people and capital structure to deliver significant value to shareholders. Meaningful synergies drive accretion for both sets of shareholders, and we believe that we are positioned to deliver industry-leading returns and long-term value creation with this combined platform.

Thank you for your interest and support as we embark on this next chapter. With that, operator, we'll turn the call open to Q&A.

[Operator Instructions] Our first question comes from Neil Mehta from Goldman Sachs.

Clay, Tom, congratulations on the transaction. I guess the first question is just -- thanks, Clay. First question is just on how you define what is core versus noncore. I appreciate that you said you go through some sort of strategic review and then -- and everything has to compete in the portfolio. But it's clear that the heart of the company will be the Delaware. Where do stuff like the Marcellus but also other assets fit within the portfolio? Any early thoughts outside of the Permian?

Yes, Neil, great question, and I know that's on everyone's mind. Here's what I would tell you. I think individually, we've made decisions about what optimizes the prior companies. I think it's a whole new set of opportunities as we combine these 2 great companies. So absolutely, first things first, we need to get to close, we need to execute on all the things that we're doing. But you can bet. First priority for the new combined management team and Board is thinking about that capital allocation amongst these assets. And absolutely, asset rationalization, as we think about what each of these assets mean, not just individually, collectively. We're a new portfolio, how they complement, really bolstered by the synergies that we'll see across the company, not just in the overlapping portfolios. And then, of course, certainly thinking about the opportunities beyond that and how do we create additional investor value. So thank you for the question.

Our next question comes from Neal Dingmann from William Blair.

Congratulations, Clay, Tom, and team, looks like quite a deal. Clay, my very quick question is just on the various operational partnerships that the combined company has or will have in the Delaware and Mid-Con.

I'm just wondering, will the deal change any of the terms or structures of these deals? And maybe more importantly, would this cause you maybe to having the larger company cause you to potentially buy out the partners or at least swap positions there so you're fully or the pro forma company is fully operating in those areas?

Neal, I think it's great. Coterra and Devon have worked very closely together collaboratively. And these partners, we both know very well. I think we have both really good relationships. I don't expect any changes in those critical JV partnerships. I think if anything, we'll have further opportunities with the scale, the leverage that we have to do further creative opportunities to create shareholder value.

Our next question comes from Doug Leggate from Wolfe Research.

Congrats to you both. I am curious, Clay, if you could share what happens to the legacy Devon optimization plan? Is that included now in the $1 billion synergies? Or will that be reported separately? Any color to separate the 2 processes would be appreciated.

Thanks for the question, Doug. We are really dedicated to delivering on the business optimization program. And remember, until close, each company really needs to deliver and continue to execute at an exceptionally high level. So I expect in our next quarterly update, you'll see significant progress on that. We feel really, really good about that. We expect to deliver, and we do not waver from that.

The synergies that we're talking about in this presentation are above and beyond the work that Devon has already been doing and the great work that Coterra has already been doing. These are truly synergies related to this combination. So thanks for the clarification question.

Our next question comes from Nitin Kumar from Mizuho.

First of all, congratulations, both Tom and Clay. Great deal. I want to talk a little bit about capital, the philosophy around capital reinvestment. You say that it's going to be less than 50% in 2027. Coterra had been delivering about 5% or more oil growth. Devon has focused on maintaining oil production. Any change or any early thoughts on how we should think about the combined company? Do you target growth? Or do you stay capital sort of in the flat mode?

Yes. Thanks for the question. Again, these were optimized decisions on the prior companies. I think when we come together, it's a whole new opportunity. We're of a different scale. We have a different beneficial portfolio. And I think the combined leadership team along with the combined Board will reset those expectations.

I don't have any additional color on that just yet, but more to come on that. And I think the opportunities are profound. When you think about the scale of these individual assets with the crown jewel asset in the Delaware Basin, it gives us a lot of capabilities. So more to come on that front.

Our next question comes from Arun Jayaram from JPMorgan.

I was wondering if you could go through kind of the go-forward leadership team and thoughts on the decision for the headquarters to be in Houston. And it does sound like OKC will play a prominent role in the organization going forward. But talk a little bit about those 2 aspects of the transaction.

Yes. Thanks, Arun. This is something Tom and I spend a lot of time in. We both have tremendous teams and really trying to find the right combination was absolutely critical to both of us. And so that was a starting bid.

Now as we think about how do we leverage the capabilities of the combined entity and make sure that we preserve that amazing upside potential that we have and not lose that was, again, just foundational in our conversations. So we've presented a nice combination that we'll detail in more clarity.

But we have also -- one of the considerations was the headquarters relocation. As you know, Devon has a very proud history in Oklahoma City. We continue to be very supportive of the community. We'll continue a very significant presence, obviously, here in Oklahoma City. But the headquarters, meaning that the executive team will relocate to Houston. That was part of the conversation. And as we think about it, a combined nearly $60 billion enterprise value company with the incredible platform we have today, but much more importantly, the incredible opportunities we're going to have over the coming decades felt like it was beneficial to be -- have that combination headquartered in Houston and really leverage those opportunities as well.

Our next question comes from Scott Hanold from RBC.

Yes, I appreciate it. Could you give us a little bit of color on your view on shareholder returns beyond the base dividend. It appears that you all have a current pro forma free cash flow yield that's meaningful, meaningfully above some of your large cap peers. So as you think about things like stock buybacks and other ways of returning cash to investors, are you going to set percentage targets do you think on free cash flow or cash flow and/or maybe just be opportunistic? So could you give us a little bit of context?

Yes, we were happy to be able to provide an early guide. Remember, this is at the direction of the new pro forma Board. And so our existing Boards have given head nods towards what that could look like. But I don't want to get too specific or ahead of my new pro forma Board. But directionally, what we're talking about is a very substantial base dividend, a nice step-up in that base dividend, and then continuing with our philosophy of hopefully that continued growth over time.

When we shift over to the share buyback capabilities, think about the combined free cash flow and what that really can mean to that. What we've telegraphed today is something north of a $5 billion share buyback program that we expect to be announced. But I can tell you, we'll really be in the driver seat when we think about option value on this tremendous free cash flow, sustainable free cash flow generating business.

So more to come on that. And again, I don't want to get too far ahead of the pro forma Board as we'll have great opportunities to really maximize significant value for the shareholders.

Our next question comes from Phillip Jungwirth from BMO.

Congratulations on the deal. Capital allocation is a large part of the deal synergies. How will you be looking at this between Delaware and non-Delaware assets? Delaware returns are some of the best in the basin, but you also have core acreage across most of the other plays. So maybe just speak to how you balance returns, inventory, managing the base and other considerations.

Yes, it's been an interesting conversation, Phillip. Individually, the teams have a little bit different methodology on how to optimize that. That's worked well for both. I think as we combine those mines and really think about how do we run that process for the pro forma company, I think it will be better together. As we really start thinking about applying these synergies and thinking about the opportunities that we have in all of these basins and all of that portfolio, I think there will be a reset of expectations.

We've done some preliminary work, both sides individually on what that capital allocation could look like. But I think it will really be as a pro forma leadership team coming together and doing that work together, that's when we'll really be able to add a lot more detail. I think it will be a quick process, but we'll need to get our new Board consummated together and really signing off that this is the right capital investment approach from a quantity and from an allocation standpoint. So more to come on that.

Our next question comes from Betty Jiang from Barclays.

Tom, Clay, congratulations on the deal. I want to ask about a bit more details on the synergy side. The $1 billion number is a lot more than what we had expected. And considering both companies are very strong operator, have very low cost, surprised to see the $350 million in capital optimization. So just maybe that $4 billion, can you speak to what part of that synergy is easy to do low-hanging fruit that can be achieved relatively soon or could take longer? And maybe just unpack that total number for us a bit more.

Yes. Thanks for the question, Betty. There will definitely be some things, I mentioned this capital allocation, that could come pretty quick. On the order of the first 6 months or so, some of the work that we're doing on capital, I think that could come pretty quick as well. We have mostly real-time contracts on all of our services. This scale is really enhancing. I think there will be other things that come in time.

In the 12 months, we've articulated what we think is kind of an 18-month focus to really fully achieve this $1 billion. As we've done with other projects, I think Tom and I are both dedicated that we want to beat that goal in quantity as well as time. So I think we'll be very focused on this. Obviously, very dedicated to communicating this, the updates on a quarterly basis.

What I would caution the investors to think about is, don't dismiss too quick. I can tell you, a year ago, we threw out on the Devon side $1 billion of just free cash flow, sustainable value creation out of thin air. And I can tell you, we are exceptionally well on our way to delivering that. I think a lot of that mindset around this technical revolution that we're going through, is -- will be very applicable.

But what I'm most excited about are these 2 incredibly brilliant teams coming together and really adding to each other's complement. This is not a one team applying their procedures to the other team, it is absolutely a combination of raising the bar collectively together. And so this will be a classic example of the 1 plus 1 equals 3, and I really think that is -- you'll be very impressed in the coming quarters on how we're able to deliver that.

Our next question comes from Kalei Akamine from Bank of America.

In the Delaware, both of you are very good operators. When you look at each of the teams, do you see different learnings that you can apply to other acreage? And if so, can you give us some examples of what those could be?

Yes, Kalei, I love the question. It's -- I think there is so much opportunity. First things first, we need to run our businesses. We need to stay safe. We need to deliver on the existing company's promises. We need to get too close. We need to consummate this deal. Then we need to really lay out what are those opportunities and capital reallocation and asset rationalization and then opportunities. When we think about the platform that we will have truly is differentiated from where we stand today, and there's so many doors that will open up at that time.

I don't want to preempt which direction we're going to go. Obviously, we need to get together and really be able to talk about that and go deep on those opportunities. But I think the enhanced portfolio, the enhanced capital efficiency, the capabilities will absolutely unlock additional opportunities, and we'll be able to really be in the driver seat to create more value from where we start.

Our next question comes from Lloyd Byrne from Jefferies.

Clay, Tom, I know it's not easy, but certainly the right thing. Let me circle back on Neil's question a little bit in a different way. Have you guys decided what just in your experience, what minimum production levels basin by basin in order to optimize productivity is?

Yes. The short answer, Lloyd, is we haven't. We want to remain flexible, I think, again, individually, the companies have optimized their portfolios. I think this really raises the opportunities and really unlocks additional potential. We will be ruthless capital allocators. These individual assets need to compete. But I'm telling you that the game will change as we apply these synergies, apply learnings, apply some of the techniques from both sides. I think this will really re-jockey some of these other opportunities, and they could -- I want to remain optimistic and opportunistic about what those options are. So more to come on that. We look forward to doing that work, and it is absolutely part of the value-creating go-forward story.

Our next question comes from John C. Freeman from Raymond James.

Congratulations. On the last comment you just made, Clay, and sort of the re-jockeying of opportunities possibly, it seems like outside of the Delaware Basin, which that one is really obvious. It seems like the Anadarko is the asset that kind of gets most transformed with this merger just given you all 2 positions kind of fit like a glove there. And that's obviously an asset that really hasn't gotten a lot of capital with either organization. Is that analysis that maybe going forward, we could see get a lot more attention following this merger?

Yes. I think Anadarko is having a new day. There's been a lot of private equity excitement and investment. Certainly, with the gas bid that's coming really helps the economics there. I think combining the companies, the positions, there'll be those operational synergies that happen. Right now, we have trucks passing on the road so to speak. We have infrastructure. We have midstream relationships in common. I think that will really unlock the real potential there.

Too early to say that we're going to rededicate a significant amount of capital, I don't want to indicate that. I just think there's real upside value creation for that asset. Look forward to those teams constructively working together and to build something combined that's greater than the individuals.

Our next question comes from Paul Cheng from Scotiabank.

In the presentation, in your prepared remarks, you're talking about opportunity for longer laterals. If we look at the combination, seems like in the Lea County, in the Delaware and also in the Anadarko Basin where you have the most overlap. Could you quantify what's the potential of that longer lateral? I mean, are we talking about, say, 100 well, 200 well? Any kind of color you can provide?

And also because those in Delaware that the Lea County is the biggest overlap. Can you give us some idea that how much is the production from the Lea County and also CapEx that the combined company on a pro forma basis currently have?

Yes. Paul, I don't have the numbers on Lea County specifically, but answering your first question, I'll go back. We do see some -- the synergies that we can extend laterals. The good news is the area we see it, it's in some of the best rock in the whole basin. And so specifically in the Delaware, it's not a huge number, but on the order of the numbers that you threw out, but then certainly thinking about that incredible value.

There's also -- it opens the door for lots of trades. Every time you do a deal like this, it kind of resets the stack, that's where we've created a tremendous amount of mutual value with partners. All of a sudden, things change and all of a sudden, something that we've been trying to get done on one side or the other that we just haven't had the right trade date, all of a sudden becomes -- we're refilled again and all of those opportunities reset. So I think that just raises the bar. So certainly, some day 1 extended lateral opportunities in the best part of the basin and then compounded by a whole new reset of partner deals that we'll be able to maximize.

Our next question comes from Kevin MacCurdy from Pickering Energy Partners.

Clay, congratulations on the deal. I know you guys worked hard to put this together. With this merger, you become one of the largest gas producers in the Permian. It seems like there will be an opportunity for free cash flow increases given the debottlenecking of the basin and the increased in-basin demand. Any thoughts on how you can approach that opportunity set now as a larger company?

Yes. Thanks for the question, Kevin. It unlocks a lot of opportunity. This is a perfect example of what scale does. We've both been very leveraging of our midstream partnerships and thinking about how do we maximize that opportunity. Obviously, when you bring more to the table, more doors open up. So I don't want to get too far ahead of myself, but I can just tell you, we've got a lot of great ideas on unlocking the gas value. We feel really good about the U.S. demand from LNG, from the digitization of the U.S. So we feel good about where that's going. Our jobs will be just getting our product to the right market. And I think with the great combined team and the real creative juices and the entrepreneurship in that -- in those organizations, I think it gives them a whole new sandbox to play in and more to come on that, but I'm really excited about that area in particular.

Our next question comes from Charles Meade from Johnson Rice.

Clay and Tom, it's both of your teams there. Clay, I want to go back to -- in your press release, you talked about -- I think the wording was accretive on key financial measures. Can you talk about -- on free cash flow in NAV, can you talk about what, I guess, the magnitude of the accretion on free cash flow and what's baked into that? Whether it's the $1 billion a year in synergies or whether there's also some CapEx cuts in there? And also perhaps more specifically with respect to NAV, what's your long-term price decks are for that accretion?

Yes. Look, we evaluate all this at strip. Obviously, we run internal sensitivities to that. But specifically on the free cash flow, which we think is just foundational to investors. Obviously, both sides have been individually working on enhancing our sustainable free cash flow. This really -- this combination is a very powerful free cash flow machine.

Absolutely, it's foundational that we deliver on these synergies to truly develop -- to deliver on the free cash flow accretion to both sides. And I can tell you, we are absolutely set on delivering that and committed to doing that for our shareholders. And then as I said in the prepared remarks, we feel very confident in being able to do that. We spent the time individually to really build this up from a fairly detailed level with actionable steps and then leveraging the skill set that we have around building the team around it, holding our teams accountable, tracking, communicating to the shareholders with regular progress. I feel very confident that you'll be impressed on how we deliver that in the coming quarters.

Our next question comes from Leo Mariani from ROTH.

I had a question for Tom here. Tom, just trying to get a sense of whether or not you guys considered other alternatives for Coterra? Basically, did you kind of shop the company broadly and look at other potential opportunities for combinations?

Thank you, Leo. As one can imagine, we've looked at all kinds of potential futures for Coterra. We've always been opportunistic and open-minded on looking at many different options. This was the best one by far. This adds tremendous value for both shareholder bases. It creates an absolutely premier company that exposes our owners to the full upside. And this was by far the best option that we had considered. And we feel very confident that we considered a full range of opportunities.

Our next question comes from Noel Parks from Tuohy Brothers.

The main question that I had concerns sort of the combined company's philosophy on product mix. And I guess I'm thinking in particular about between now, you're having a combination of associated gas from the Delaware, huge Marcellus position, substantial gas also from Oklahoma. I was wondering if you could maybe talk about your philosophy on infrastructure development and ownership going forward and whether the notion of sort of a more integrated gas midstream, upstream philosophy going forward holds any appeal for you?

Yes. Thanks for the question. I mean, you certainly hit on an opportunity with a company of this kind of scale, a lot of those doors swing wide open, either in key partnerships related to maximizing the value of our commodities, certainly in natural gas, NGLs and of course, oil, but also us leaning in that direction.

Again, we need to get the teams together. I don't want to get too far ahead of the great ideas of our collective management team and certainly our Board. But I think those are the kind of opportunities that are way above and beyond the synergy numbers that we put down. So the $1 billion to me is a base case of tangible value that we will be able to articulate for our shareholders, but an idea like you're talking about and so many others really will be at our feet as opportunities to create incredible value above and beyond what the day 1 combination looks like. So thanks for bringing it up and more to come on lots of fronts around additional value-creating opportunities.

We currently have no further questions. So I'd like to hand back to Clay for some closing remarks.

Yes. Thank you again for everyone. I appreciate everyone's interest today. If you have any further questions, don't hesitate to reach out to the Investor Relations team of Devon or of Coterra. So thank you. Have a great day.

This concludes today's call. We thank everyone for joining. You may now disconnect your lines.

All right. Wonderful. Thanks, everyone, for being here. We've got an all-star panel here to talk about the diversified shale E&P business model, Coterra, Devon, Ovintiv and Northern Oil and Gas. Thank you all for being here in sunny Florida and so much to talk about across the ecosystem.

So I want to spend some time on the macro, then each of you guys have had some important capital projects. I want to unpack that and then get to whatever is on your mind as well. And so one of the debates that we've heard around the conference is the idea of being pure play versus being diversified.

And there were some at our special forum last night or even this morning who argued there's a lot of advantage to be concentrated in one basin. Each of you had a slightly different business model where you have argued that there's advantage to having a portfolio. So maybe we start with you, Shane, and talk about the benefits of operating a diversified upstream portfolio. And how do you think -- what's needed to get the market to better appreciate operating in multiple basins?

Yes. Well, thank you. First of all, happy New Year and everybody up here, and thank you for having us at the conference again this year.

Look, it's a great question. It's one we think about quite a bit at the management level. It's one that we review and talk about with the Board on a regular basis. And -- but look, I would say, as I think about the diversified or even balanced business model because, again, we do strive that balance between the 2 commodities as part of a diversified strategy, there's really probably 3 areas that I think about.

I think there's a strategic element or benefit of being there, and that's the ability to allocate capital as markets change. And from time to time, gas is high and oil is low or gas is low and oil is high, and you've got the ability to pivot capital into the part of the inventory that still has good economics. And so there's a strategic element.

I think there's also an operating element that's out there. You go through a long list, but benefits of having multi-basin and learnings and cross-pollinization. And again, we go through a long list, but 2 things I'll just highlight that I think are important in our portfolio. One is marketing. I would tell you, 5, 6, 7, 8 years ago, as we thought about gas in West Texas, we thought about flow assurance and making sure -- regularly trying to make sure flaring was reduced, et cetera, but making sure we could produce the liquids molecules.

Whereas in the Northeast, we've had a team up there for a long time that's been focused on maximizing the value of the gas molecule. And they really brought that approach into West Texas and New Mexico and done the same. So you've seen our portfolio begin to evolve and not just get more heavily involved in financial hedging on the one hand or takeaway capacity, which we've continued to add and it is something that they've done well in the Northeast for a long time. But be get at other things like power contracts where we can link our pricing to power.

The same team that put together the power contracts we've had in the Northeast for a while, has done that in a deal that we put together last year with some other partners. In West Texas, you see the LNG portfolio that the team has put together where we have contracts with each one of our business units in various international markets. And so it's just been a real, real benefit to have sort of that balance and be able to transfer learnings in one area to another. And I want to get into D&C and other places.

And then the third element, I would say, the financial elements of it. And as we've seen over the last -- well over 2023, 2024, the gas-to-oil ratio was probably in the 30x to 40x the value of oil to the value of gas. And yet as you look as we got into the winter of '25, it got down into the low double digits. And so it will move around over time. And having a balanced portfolio of gas and oil gives you a little bit more stability or we think gives us more stability in our cash flows.

And we think that's important, particularly for folks and investors that are focused on return of capital because what does that do? It gives us great dividend coverage. We have a very healthy dividend. We went to that in early 2023. And even in an environment where oil feels soft, we've still got 2x, 3x, 4x coverage on our dividend relative to our free cash flow. So it gives us a lot of confidence in the ability to not just maintain but grow that and then use share repurchase as a bit of a flywheel over time.

Yes. Thanks, Shane. And Corey, your perspective from Ovintiv is also -- this is something that we've talked about for the last decade. What is the optimal portfolio. And really, over the last 5 years, you have transformed -- you and Brendan have transformed the business to core up to 2 key places. to the Montney and the Permian.

Talk about that transformation. Why did you elect to shrink the portfolio to those 2 places. And one of the key catalysts that we'll be watching for this year is the monetization of the Mid-Con to really now get you into those 2 key basins. So talk about the portfolio transformation.

Yes. First of all, I mean, if anybody up here wants to buy our Anadarko, we can stay around later. If you look at our portfolio, I mean, some of the reasons we like our Permian and Montney position a lot is the inventory that is remaining there. So you ask what's the right company strategy, whether you're a pure player, multi-basin. I think understanding, and this is maybe a little bit, Shane, what you're talking about, what's your company really good at? And how are we going to create value by having a differential advantage. So as we look at our operations in different basins, how can we procure our strategy of developing cubes and getting good returns and do that for a long period of time.

So we like the Montney because it's got that long runway. I mean everybody knows the Permian. Our advantage in the Montney is probably we've been there for longer than most companies. It's -- the good news is it's largely undeveloped. The bad news is that's the history of not having construction and egress built in the basin. And now that, that's changing, it's really unlocked the opportunity to develop more of that resource. So don't think about it so much as a debate between is it better to be in 1 or 2 or 3 or 4. But as a company, what are we good at and how do we drive that to the bottom line and actually have a competitive advantage by being a good operator.

A lot of the things that we do in the Permian, some of them came from the Montney. And one of the most interesting things we're doing up there is a lot of the automation around our -- not just our D&C business, but our base business and bringing in the acquisition we did last year, and we'll do that again as we closed NuVista, it allows us to operate remotely. It allows us to start to use automation and AI. And that's something that maybe is a little bit different structure than exists in the Permian, but we'll absolutely start doing that in the Permian.

And likewise, all the advances we've had in simul-frac and trimul-frac and continuous pumping, that pushes our Montney team to get better and to try that. And if you're only in one of those basins, you don't have that opportunity to look across and test yourself against the performance of other companies in the basin as well as your own operating team. So I think there is definitely benefits to being in more than one if you can show that you've got an advantage in doing so.

Corey, on the Anadarko or the Mid-Con, can you just talk about where we stand in that process? I'll be instrumental in getting you to your $4 billion net debt target?

Yes. So it's a little bit different than we've done historically. Usually, like most companies, we prefer not to set expectations ahead of time that we'll be selling something. I don't think it came as a surprise that we paired it with the announcement of the NuVista acquisition. But we just started that at that time of announcement. We've picked advisers. We've talked to numerous companies that might be potential buyers, and we're just in the early stages of getting all the data room prepared.

Obviously, the macro backdrop means it's going to be potentially challenging in a couple of weeks as people are more worried about the front part of the curve, but these are long-dated PDP assets. So it matters just as much what our long-term view of oil is as much as it is the next month or quarter or 2 quarters on the strip.

Yes. Thanks, Corey. Nick, you just announced an important acquisition in the gas landscape in the Utica. Can you talk a little bit about how that came together? And what do you want to drive out of that basin?

Sure. We are a little bit different than the rest of the folks here. We're a 100% non-operator. But increasingly, over the last 5 years, we have been partnering with our operating partners to acquire assets, so taking an undivided stake, think of us as a passive partner and then signing contemporaneous contracts to help develop those assets and exploit them over time. This transaction, in particular, was very complicated in the sense that you had a selling party that was actually 2 parties. It was both a public upstream company, a public midstream company that was affiliated with it, and it was also acquiring another private business of substantial scale with both of those entities.

So -- and we were partnering as a 49% partner with another public company. And so what we have been doing as of late is we evaluate these properties, both non-operated and operated assets on what we call an basis, meaning we look at the asset as if we were going to buy 100% of it, and we spend that time. Now that evaluation can be very different if Clay is operating it or if Coterra is operating it.

One is better?

Both.

They are both very good. Devon is one of our largest operators. But what I would tell you is that, that underwriting case is going to be very different. The PDP will be the same because it's a producing asset, but the development case can be very different. So it's not plug and play. But we tend to hold out who we're going to pick as our "dance partner because we obviously want to see if we can win the transaction. And in this case, obviously, the transaction in and of itself was going to be tied to whether or not Antero in and of itself was going to win the HG transaction.

So when that happened, obviously, you had a situation where it came together very, very fast. And for our partner, in particular, which is a smaller, newer public company, our capital was incredibly important in order to facilitate this transaction. What I can tell you is that there's something very unique about this transaction, which is that we are buying the midstream and the upstream assets in this case. for the upstream company, even though they are affiliated, the upstream company has to pay the midstream company. And so its cost structure is very different than ours will be.

So when you don't own the midstream and you're paying your midstream entity $4 plus for your water that costs $0.75, it really does change the cost structure of that -- of your upstream entity. So what was once a field that cost that operator, call it, $3 an Mcf to operate now goes down to about $1.80 when it's fully integrated. And so for that asset, it has meant that once produced in a midstream system that has $0.5 billion invested in it alone, that once produced about 600 million a day is down to around 150 million a day and yet has tons of running room.

So we will be able to grow it almost triple the volumes over the next 5 years. And because of that midstream system that is built out already, there's a huge ability to grow both the midstream and the upstream footprint along the way. So for us, it's a huge both volume and acreage growth engine for us in the gas play. And again, that's not adding on to the fact that I think that we think there's some pretty interesting cost and performance upside along the way.

Clay, we'll round out this conversation about portfolio optimization with you. And you were remarking before, you said, "Hey, look, there's a lot of conversation about the long term. And I think that part of -- at this conference, and I think part of that is we're entering into a maturity phase for shale, whether it's peak or not, I think most of us are skeptical at the peak argument, but I think we're getting to a more mature flatter profile.

So what does Devon look like in 2030 to 2035. And it's become a topic. And if to the extent we're in a period of cyclical weakness, how can the company position itself organically or inorganically to make sure that it's the best version of Devon when we get into next decade. Does that make sense?

Yes. Well, thanks for the question, Neil. I mean, I think we are at our best in this industry during the toughest times. And so I look forward to what I think could be shaping up as really a choppy '26. But I think clean balance sheets, good inventory, a team that's really honed and focused on the right thing. For us, our focus over the last year has been really on sustainable free cash flow. We set out a $1 billion target by the end of this year to achieve an incremental $1 billion of sustainable free cash flow. We're well on our way over 60% there. I feel very confident in being able to achieve that.

But the byproducts of that, I think, are really set us up very well for the future. So the byproducts are exceptionally good benchmarking, really leveraging all of these accomplishments via technology, really thinking about how do we not just run through the tape of this $1 billion and then make sure that it is sustainable that we hold on to it, but really think about how that sets us up for future actions. And when we think 5, 10, 15 years out, I typically skip through the 5 years and out 10 to 15 because it kind of clarifies a little bit of -- our portfolio looks really strong through that kind of mid-decade period. And so it gives us a little bit of a cover that we're fine. We're still generating very significant free cash flow. Nothing to see here.

What I would tell you is today and when the good times are going on, that's exactly when we need to be thinking about the much longer term beyond just for us, 5 basins, resource plays, focused on oil, domestic, you rewind back 15 years ago, Devon looks entirely different. My wager would be Devon 15 years from now will look entirely different. So how do we elegantly make that transition, make sure that we're prepared, that we're opportunistic, both from an offensive and a defensive perspective that we're prepared to be on the front foot of those opportunities that come our way.

Can you talk about -- you've talked about concentric circles of competency. What are things that could be part of what that profile? Does offshore come back again? We've talked about Fervo, for example, being an area of interesting growth in geothermal long term. Where could you see Devon evolving to?

Yes. Certainly, we've had 2 big parallel missions over the last year. The first, we've been very transparent about talking to the organization and then talking to investors about as well, and that's the business optimization. That's the $1 billion sustainable free cash flow target. the parallel, which we've been a little bit quieter on just because most of the time, our investors don't really have a lot of appetite for very long-term discussions. Some investors do, most investors don't. And I think we have to pay close attention to making sure that we're also passing kind of everyone everyday sniff test.

When we think about that opportunity and we think much longer term and the work that we've been doing, we've done a lot of soul searching on what's Devon's capabilities, what those opportunities are, where that Venn diagram overlaps and then what could be kind of next steps for us. Devon has a long history. We've been around the globe and back. And I would think some of those things could come back into vogue. When I think about something a bigger step, let's go pretty far extreme, West African exploration, deepwater, have probably not Devon's next logical next best step.

You mentioned something like Fervo. That sounds very far afield from what we do today, geothermal. But when you think about it, it's exceptionally good geology work and geophysics work. It's ground floor leasing of land. It's drilling horizontal wells, completing horizontal wells and then building surface facilities. That kind of sounds familiar to what we do. Now we don't market electrons today. But hey, we're smart enough to figure out how to partner, how to close that gap and we think about those kind of things. I think that really could be something that's interesting when you look further out kind of into the next decade.

Meanwhile, we're exceptionally happy with the portfolio we have. We're really focused on achieving these near-term targets. And when I think about the most important things that we can do for value creation for our shareholders is deliver on that, control the controllables, make sure quarter after quarter, we deliver and therefore, we get -- we earn the right to be thinking further and further out in the future in some of these more interesting and longer-term opportunities.

Okay. Last one for you, Clay. You are an AI evangelizer in...

Bring it on brother.

Had an intervention with me when he...

I honestly did.

When he found out that I didn't use it. I was going to get fired. So...

He's now fixed. He's fully converted.

So talk about how important that is to you achieving your $1 billion free cash flow target and just how much confidence you have in your ability to exceed that?

Yes. Neil, I thought about it as kind of the analogy of you've got this organization and everybody wants to pull the same direction. Everybody wants to know where are we going. Everybody wants to know kind of tell me what winning looks like. And so we had to find the mountain that we were going to point to and say, okay, that's the mountain we're going to take. And in our case, sustainable free cash flow, it was just all inclusive. Everyone in the organization can contribute in one way or another all the way through the value chain, right? The sustainability piece is so very important as well.

The question then becomes, okay, how do we take this mountain. And the way that we've been able to equip people to be able to take this mountain is through technology. And so right now, in addition to the 60% plus that we've already accomplished, we have 80 value work streams that are running in parallel. When a project gets to a point where we've kind of crisened it as it's doable, it's material enough, and we want to track it, we put a template around it to make sure that we've got goals set around it, we hold people accountable. We achieve the goals as per plan and then that we actually see it flow all the way through the financial statements and get tracked all the way through the bottom line.

Right now, we have 80 of those. I can tell you, every single one of those are enabled by AI. One way or another, they are enabled by AI. Internally, we talk about these 3 waves. Wave 1 is essentially making data more accessible. That's kind of how most of us use AI today. We had engineers that spend 75% of their time trying to find data, 25% analyze the data. We flip flop that. Now they're 25% finding the data, 75% analyzing the data. Therefore, they're 3x more effective. That's kind of Wave 1, very common, right?

Wave 2 is where you have integral AI into the workflow. It's part of the team. It's part of the process, and we have teams that are working very much in that realm today. Now that's not across the board, whereas Wave 1 is pretty ubiquitous around the company. Wave 2 is just really starting, and we've got 2 or 3 groups that are really breaking out. What's really interesting is by year-end, we will have full-fledged Wave 3 opportunities.

Wave 3 is where you take a whiteboard on a project. You say, look, if I were to start over on how we do this, this thing, whatever this is, at the center of it would be technology, and then we would build out the capabilities around that. That's true Wave 3. And I would tell you, we have early projects on that. By year-end, we'll have projects completely rebuilt around AI, ground floor as a technology center.

Awesome. Let's pivot over to the assets. And Corey, why don't we start with you. Last year was a very important year for your Montney business. You showcased more of what you're looking to do in the Montney and you announced the acquisition of NuVista. So do you think the market is starting to better appreciate the upside from the Montney as an asset? And what are your key objectives in that basin this year?

Yes. Again, I kind of talked about it in the opening comments, we love the rock in the Montney, and we get the chance to show that to our own internal teams, the subsurface and engineers that study the Permian, and they're always amazed at how amazing it actually still is, and it's still there. Where has this been hiding is kind of the common phrase we get from them.

In combination buying NuVista and last year closing on Paramount, we feel really good about the inventory duration we have there. We've got 15 to 20 years on the oil side. So this is predominantly condensate, and it's sold in the market to predominantly oil sands producers as a diluent and it prices pretty close to flat to WTI. So this is an environment where you got an attractive royalty structure. It's a Canadian dollar cost. It's a low entry cost, and it's also receiving premium local pricing.

So we think as people spend more time and study it, they're going to appreciate how good the resource is and how much is left. Some of what we talk about and if you ask the question 10, 15 years out, there's lots left in the Montney to do. And part of the objective this year is to do kind of like we did last year and get after these synergies really quickly to demonstrate that, that leading operation in the Montney is still going on. And we talked about $100 million of synergies annually out of just this acquisition. That's on top of what we already got out of the Paramount acreage acquisition last year. We got through that relatively quickly within a couple of quarters. So that will be the operating team focus in the very short term and then bringing that into the portfolio and highlighting that.

We've taken sell side and buy side up to the Montney a number of times just to showcase it. And I think seeing it and feeling it and getting to observe what's there. It's kind of like the first trip to the Permian that people get to look around and appreciate the landscape, and it's a good place to operate. And then when you get up to the Montney and you realize that it's actually just like forest and there's literally nothing around.

So it's good to operate there. It's just a little bit different in terms of the history and the legacy we have on knowing how to get value out of it. So that's our focus this year for sure in the Montney.

Shane, let's talk about the Marcellus and also the Permian. But on the Marcellus, maybe you can address directly kind of the question in the room about there are some who want you to monetize your Marcellus position. And what are, in your minds, the pluses and minuses of doing so? And what's -- if there is a financial constraint that you want the market to know about, maybe you can share that.

And then in the Permian, overall, you exited the year very strong, but it was a choppy middle with some of the water issues. And so talk about lessons learned and confidence you have around operational momentum in 2026.

Yes. That's great. Well, so starting with the Marcellus, and thank you for asking. Look, the Marcellus has been an excellent asset for us and an excellent fit for our business. It gives us a tremendous amount of free cash flow. at a very low reinvestment rate, which has really benefited our growth in the Permian over the last 3 years, 3 years plus going. And so we are very happy with the performance of that business.

I think I look at it and say the Northeast Pennsylvania is top-tier rock. The Delaware is top-tier rock. We talked about the various synergies, whether it be strategic, operational or financial. But that's really the North Star by which we try to put together the portfolio is to own top-tier assets. And the Marcellus certainly stands out in that regard. So those will be a few of the things that I would point to in the Marcellus.

If I pivot to the Permian and the Delaware for a moment, we had challenges in Culberson in the second quarter. we were able -- the team was able to quickly muster, get together and develop a plan that really substituted out some Harkey wells in the second half of the year for Upper Wolfcamp wells and essentially keep the entire year flat to where we had been guidance-wise as we went through an evaluation, a diagnosis and a remediation of the Harkey.

And again, I'll put it into 3 quick buckets. One, there's what was on the particular row that had the encroachment issues for us, the Wyndham Row. And there, we were able to remediate through some cement squeeze jobs and in the cross flow of water coming from the upper injection zone. And then -- and those are dewatering, and we'll sort of see how that plays out. It's 5 net wells. So it's not a tremendous amount of the portfolio.

If I look outside in the other row development in the third quarter, we went ahead and completed 6 of the wells, Harkey wells that have already been drilled or were in flight, and those have performed in line to better than our expectations had previously been. And then outside of the general row development, we have a plan that's 25 to 30 Harkey wells a year outside of that.

So we feel really, really good about the lessons learned from the experience in the Harkey. And frankly, the team's ability to recover from a bit of a hiccup in operations and still deliver what we had originally promised to deliver to our shareholders in oil volumes for 2025.

Thank you Shane. Vic, you've got a unique perspective of what's happening across the United States, given that you're an investor in a number of these different assets. We're in a period of commodity softness. There's an argument to say that we go even lower. Are we at these breakeven levels where some of these basins might shift into decline as we think about 2026?

Yes. I mean I don't want to sound -- sorry, I don't want to sound pessimistic or anything like that towards the asset base, but we see it all. We're in 4 basins, 6 distinct plays. We evaluate almost every M&A process that comes across the table every single year. And we evaluate over 400 ground game deals a year. So we see the gamut. We own over 1 million gross acres. We've spent over $20 million on the Palantir back system. So I put our data against anyone in the country.

And what I would tell you is that this is a cyclical industry. And I think I'm actually a little bit interested when I speak to investors, I spent 18 years as a buy-side investor. So I know how you guys think and I spend a lot of time doing it. And I look at what's happened to the equities over the last year, what I've seen is oil prices have gone down and the stocks have gone down and so the multiples, right? And that's not typical, right? If you go back to 2024, right, gas prices went to $2. And what happened with gas stocks was the multiples expanded, and that's what happens at trough because everybody knows that the marginal cost of production for natural gas in this country is about $3.50.

Well, the marginal cost for production in the United States, in my opinion, and based on what we see, and we evaluate every AFE individually in our business, and we'll use the Williston Basin, which is our legacy basin, is about $70, maybe $65 and costs are not going down. In fact, we're budgeting actually this year for inflation because now it may or may not happen, maybe we'll see some deflation, we'll see. But the bulk of the cost savings we've seen in the U.S. over the last couple of years has been folks like these guys going faster, and they've been shaving days, and that's how they've been saving money.

And so -- and the average well, we're going to cube development. So the average well is actually getting worse. It doesn't mean that the well itself is getting worse, but it means that we're not just cherrypicking and drilling the best zones, the Wolfcamp A or what have you. Now we're drilling a full -- we're drilling the full cube, right? And so what that means is that the average well in the Permian will appear to you to be worse. And certainly, as we drill longer laterals in the Williston, as an example, we get better wells, but they're also much longer laterals. That's why they're better wells.

And so what I would tell you is that if you look at last year's 914 data, the U.S. production is up about 600,000 or 700,000 barrels a day and the entirety of that is New Mexico and the Gulf of Mexico -- sorry, Gulf of America, excuse me, sorry, I apologize. And that is a handful of projects. I'm not an expert on the Gulf, but that's a handful of projects, as I understand, from the majors offshore and New Mexico, which has been really the sole growth engine in the Permian. The Eagle Ford is in decline. The Bakken is largely in decline and the rest of the conventional basins in the U.S. are in either flat or in decline. I mean, California, as an example, is down over 50% over the last 6 years.

And so what I would tell you is that this is a cyclical business. And what I find interesting is that the pessimism that happens, oil could go anywhere. And certainly, we are in a period of oversupply today. But the cure for low prices is low prices. And so if we have a period where oil prices go to $40, they could go anywhere. I mean I've learned this the hard way in my career, which is that prices can go anywhere. They can go to $120, they can go to 0 or negative $37, I believe, which is the bottom. That was fun.

But what I would tell you is that we are below the price in which it will keep U.S. production at its current levels. Really low cost of capital, big public companies can sustain their volumes for a long time, but private companies can't. We have a good portion of private companies, and they're already cutting their capital. And so it might not happen today or tomorrow, but this is a cyclical business, and I believe strongly that we're at the bottom of the cycle, and I don't think the equity markets are prepared for that. And I don't think oil prices are there. So Venezuela will be damned.

At the end of the day, 65% of every incremental barrel produced in the world for growth over the last 10 years has come from the United States. So you can crowd out those barrels, but you still need the price to be at a level that keeps U.S. production flat. 40% of every barrel produced in this country a year is drilled in this year. And so it's going to need at the end of the day to be at a price that can sustain that. And the data we see, it doesn't do it. And people are willing in our industry to drill a marginal barrel for a while, but they can only do that for so long.

And so Nick, your view of the marginal cost of supply, if it is in the United States is...

$65 to $70.

WTI.

And I think it will rise over time. I don't think we're -- I don't see efficiencies growing. I think that inventory is certainly in shale. Look, this industry is incredible at innovation. So I don't want to dismiss anything that my operating partners are capable of doing. But I would say at this point, we have been hitting these fields like the Williston for 15 years. There is only a limited amount of white space as they say.

Clay, do you have a different perspective? You may be more infra marginal, but your perspective because you operate in a number of these basins, too.

So when I rewind back from 2010 to 2020, we were getting incrementally better. You look at just the average well productivity for that decade, it was incredible. It just kept getting better and better as we figured out how to drill these wells, how to land the zones, understand the rock, understand the stimulation. And then somewhere around 2020 to current, we've kind of plateaued on productivity and actually have seen a rollover on a per well. And some of that's moving from core to Tier 1, 2, 3, however you describe those. And then it's also what Nick just talked about, some of this cube development where you're really making sure that you're grabbing all of the wells at one time.

The interesting thing is we are still seeing an incremental capital efficiency because the operational technology has been able to offset that normal portfolio degradation. So we are still seeing capital efficiency hold its own. Now how long can that tug of war go? You've got a normal maturing of these portfolios, and then you've got a technological innovation, operational kind of pulling the other way. And that inevitably will roll. I would say I'm a little more optimistic.

As I look at the numbers close in, I think we're holding our own. We actually have continued to improve from '23 to '24, '24 to '25, high single-digit improvement on well costs year-over-year twice now. I don't know where it goes from here, but that's more than offset the productivity degradation or the maturing of those portfolios. Can't last forever. But I think so far, we've done a really good job of holding our own in this kind of first half of the decade. Second half of the decade continues to get harder. We believe our portfolio holds up really strong, continue to get smarter, apply more technology. I think we can hold our own on capital efficiency and maybe even improve.

Thank you, Clay. Thank you all. It's a great conversation. We appreciate investors taking the time as well. Thank you all.

Yes. Thanks, everybody.

Welcome to Devon Energy's Third Quarter 2025 Conference Call. [Operator Instructions] This call is being recorded. I'd now like to turn the call over to Mr. Chris Carr, Director of Investor Relations. You may begin.

Good morning, and thank you for joining us on the call today. Last night, we issued Devon's third quarter earnings release and presentation materials. Throughout the call today, we will make references 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, Chief Executive Officer; Jeff Ritenour, Chief Financial Officer; John Raines, SVP, Asset Management; Tom Hellman, SVP E&P Operations; and Trey Lowe, SVP and Chief Technology Officer.

As a reminder, this call will include forward-looking statements 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.

With that, I'll turn the call over to Clay.

Thank you, Chris. Good morning, everyone, and thank you for joining us.

Let's begin with Slide 2. I with outstanding execution and innovation from every part of our organization, Devon delivered another outstanding quarter. I'm proud of our team's performance. We exceeded the midpoint of guidance on every key metric, including production, operating costs and capital. These results mark our strongest performance of the year, highlighting the exceptional quality of our assets and our unwavering commitment to operational efficiency and cost control.

Building on this performance, we continue to advance our business optimization plan firmly on track to generate an incremental $1 billion of annual pretax free cash flow. As we enter the fourth quarter, we have already achieved more than 60% of our target, underscoring both the effectiveness and urgency of our approach. These initiatives go beyond cost reductions. They are fundamentally reshaping our business by enhancing margins and boosting capital efficiency across our portfolio. The output of these compounding efforts show up in our strong preliminary outlook for 2026, which Jeff will discuss in more detail.

Despite persistent macro headwinds, these achievements directly contributed to our resilient free cash flow as we returned over $400 million to shareholders in the quarter and retired $485 million of debt, demonstrating our focus on delivering meaningful value to our shareholders. Beyond business optimization, we continue to unlock significant value throughout our portfolio. While getting into the details on a later slide, our teams have capitalized on a multitude of opportunities to drive additional value for the organization. Collectively, these achievements reinforce Devon's momentum and position us exceptionally well for the remainder of 2025 and into 2026.

Let's flip to Slide 4 and take a deeper look at the quarter. Our relentless focus on production optimization continues to drive our outperformance. With oil production exceeding the midpoint of guidance by 3,000 barrels per day, the outstanding efforts of our teams to reduce artificial lift failure rates and improve workover efficiencies resulted in a 5% reduction in operating costs compared to the start of the year. Additionally, effective cost management drove our capital investment 10% below the first half run rate. These accomplishments, combined with other ongoing initiatives, led to robust free cash flow of $820 million in the third quarter and enabled us to deliver substantial cash returns to our shareholders.

Moving to Slide 5. Our consistent track record of disciplined execution and tireless pursuit of capital efficiency is evident. Quarter after quarter, we drive meaningful improvements to our outlook. This momentum is reflected in our updated guidance, where we've raised our full year production expectations every quarter this year while reducing capital by $400 million since our preliminary guidance. These are not isolated wins. They result directly from our steadfast commitment to operational excellence, our culture of continuous improvement, and a rapid adoption of leading-edge technologies across our portfolio.

Now looking at Slide 6. This continuous improvement is also resulting in top-tier performance versus our competitors. Our well productivity stands in the upper echelon of our peers, reflecting the strength of our asset portfolio and the execution of our teams across every basin. On the right-hand side, our disciplined approach to capital allocation is evident in our industry-leading capital efficiency, setting us apart in a highly competitive space. These achievements highlight the power of our advantaged portfolio, and the rigor of our capital allocation process and the ability of our people to drive superior results. And with our extensive inventory, we are well positioned to continue this strong performance moving forward.

Turning to our business optimization initiative highlighted on Slide 7. Our teams are outperforming expectations and delivering results well ahead of schedule. We have already captured more than 60% of our ambitious $1 billion target. When we originally launched this initiative, our focus was -- for year-end 2025 was $300 million in value uplift. As shown on the left side of the slide, we are on pace to double that milestone this year alone. This exceptional progress is highlighted this quarter by our significant progress and capital efficiency and production optimization on the right side, and we are fully confident in our ability to deliver the substantial cash flow improvements as we advance towards 2026.

Driving this rapid progress is our outstanding execution. With greater visibility and confidence in our 2025 full year production volumes, we anticipate a sustainable increase in free cash flow of $150 million resulting from incremental 20,000 BOE per day above our initial baseline when this initiative began. This reflects further acceleration from our outlook from last quarter, highlighting the urgency of our efforts.

When we announced the plan in April, we recognized that the market wouldn't immediately price the aspirational $1 billion of incremental free cash flow in our share price. We knew we would have to earn it. While the plan is still in flight, I'm encouraged that Devon's stock is starting to feel a bit of relative appreciation to our peers. That said, I believe that we have much more ground to gain and I look forward to earning that value in time.

Slide 8 showcases key examples of the initiatives our teams are pursuing to meet targets in each category. These represent some of the most impactful efforts currently underway. As our teams proactively implement these initiatives, we remain confident in our ability to achieve our targets and maintain clear line of sight to our objective.

Turning to Slide 9. I'd like to highlight several portfolio optimization actions we've taken on this year, which are delivering an uplift of over $1 billion to enterprise NAV. Importantly, these gains are in addition to the improvements through our ongoing business optimization initiatives. Early in the year, we signed an agreement to dissolve our joint venture in the Eagle Ford, giving us control of our development and the ability to reduce well costs and significantly enhance returns.

In Q2, we completed the sale of the Matterhorn pipeline and subsequently acquired the remaining interest in Cotton Draw Midstream. Last quarter, we executed 2 strategic gas marketing agreements that expanded our natural gas sales portfolio into premium markets. In Q3, we acquired approximately 60 net locations in New Mexico for $170 million, increasing our runway of high-return opportunities in Delaware. And finally, we've benefited from the WaterBridge IPO, which now provides a public marker for our investment valued at greater than $400 million. These actions showcased our team's initiative and strategic thinking to create shareholder value.

As we execute our business plan, we will seek further opportunities to optimize capital allocation efficiency, costs and asset mix. We remain committed to a continuous improvement, innovation and technological leadership, taking decisive steps to strengthen our operations and deliver strong shareholder returns.

With that, I'll hand the call over to Jeff.

Thanks, Clay. Turning to Slide 10. Devon delivered another quarter of strong financial results. In the third quarter, we generated operating cash flow of $1.7 billion. After funding capital requirements, free cash flow totaled $820 million. This robust free cash flow generation enabled us to return significant value to shareholders, including $151 million in dividends and $250 million in share repurchases. We remain committed to our capital allocation framework, balancing high-return investments with substantial cash returns to shareholders.

Moving to Slide 11. Devon's financial strength and liquidity continue to set us apart. We ended the quarter with $4.3 billion in total liquidity, including $1.3 billion in cash. Our net debt-to-EBITDA ratio remains low at 0.9x, underscoring our commitment to a strong balance sheet. As part of our disciplined capital return framework, we accelerated the retirement of $485 million in debt this quarter, completing the repayment ahead of schedule and generating approximately $30 million in annual interest savings. With this action, we've now achieved nearly $1 billion towards our $2.5 billion debt reduction target.

Looking ahead, our next maturity is our $1 billion term loan due in September of 2026. We remain focused on executing our debt reduction strategy and maintaining the financial flexibility that supports Devon's value-enhancing growth.

Beyond debt reduction, we also used cash on hand to acquire all outstanding noncontrolling interest in Cotton Draw Midstream, saving $50 million in annual distributions and secured additional resources in the Delaware, as Clay mentioned earlier. These timely transactions reinforce the value of maintaining an investment-grade balance sheet and ample liquidity. As we approach 2026, we're determined to accelerate our operational momentum, prioritizing per share growth, maximizing free cash flow and making targeted reinvestments for sustained success.

Slide 12 highlights the key attributes supporting our strong preliminary outlook for 2026. Given ongoing commodity price volatility, we're taking a disciplined approach to capital planning. We intend to maintain consistent activity levels to keep production around 845,000 BOE per day with oil production at approximately 388,000 barrels per day. With macroeconomic uncertainty and an appearance of a well-supplied oil market, we do not plan to add incremental barrels to the market at this time.

To support this production profile in 2026, we anticipate capital investment of $3.5 billion to $3.7 billion, a reduction of $500 million compared to our maintenance capital levels just 1 year ago. Importantly, we can fund this program below $45 WTI, including the dividend, providing significant flexibility. This disciplined plan positions us to generate strong free cash flow at current prices and to deliver a free cash flow yield that exceeds the broader market.

Regarding free cash flow allocation, our financial framework provides flexibility to deliver market-leading cash returns to shareholders and achieve our debt reduction objectives. We'll continue to target share repurchases of $200 million to $300 million per quarter and will retain free cash flow beyond share repurchases on the balance sheet to efficiently reduce net leverage. Complete 2026 guidance will be provided on our February call after the budget is finalized with our Board.

In summary, Devon had all the key attributes to thrive in today's environment and create value well into the future. Our high-quality portfolio provides a solid foundation while our disciplined strategy keeps us focused on growing per share value and generating free cash flow. With a strong balance sheet, we are positioned to deliver lasting value and confidently navigate whatever the market brings.

With that, I'll now turn the call back over to Chris for Q&A.

Thanks, Jeff. We'll now open the call to [Operator Instructions] With that, operator, we'll take our first question.

Our first question comes from Neil Mehta with Goldman Sachs.

Yes. Thanks so much for the visibility as we look into 2026. And I think the capital efficiency and the cost savings is really starting to materialize, including in the guidance of -- maybe that's where we start off, which is where we are in the business optimization program in the $1 billion. Can you give us a little bit of color on Slide 8, but it kind of unpack what's left to do in the journey. And if you end up [ surprises ] to the upside relative to the initial guide, where could that be?

Yes, Neil, appreciate it. This is Clay. We're incredibly proud. This was a big hairy audacious goal. When Jeff and I started first contemplating, one, what was the metric we wanted to focus on, and that was sustainable free cash flow? And then how audacious should it be? And what kind of time frame should we put it around. I can tell you there was a tremendous amount of discomfort around the organization. And just amongst Jeff and I on how do we get there from here? But what we knew, I mean, deep in our soul was that you get the flywheel starting to turn, and there's so much that continues to come our way.

Right now, we have over 80 parallel work streams on different ideas. So the progress that we made essentially in 1/3 of the time to accomplish 60% of the results, I can tell you, I'm even more encouraged about what this leads to. The most important measure of success will be locking these earnings in and building into the culture of the organization, benchmarking, hunger for more creative ways of creating value. And like I said, there is much more to come from this.

Trey, you may jump in and just throw a couple of pieces of color of ideas that you have.

You bet. I appreciate the question, Neil. We've -- Clay mentioned the 80 work streams that we have ongoing. The early results that we saw, a lot of them showed up very quickly in the capital side of our business on the drilling completions operations. Over the last quarter, last kind of 4, 5 months, we've seen a lot of new ideas arriving from our production department, and we continue to see those starting to show up now in our forecast and what's going forward.

One of the examples I mentioned even a quarter ago was our focus on automating and using our technology stack to help us with our downtime. We've made a ton of progress over the last 3 months on that one and scaled that across the organization. And now we're working on the next phase of using even more kind of AI to underpin what we're trying to do to continue to look at our faults and what causes those faults. And we're going to see those type of examples show up -- we estimate an over $10 million on that work stream in 2026, but that shows up, and that's sticky like Clay said, and we'll see that in our base production. And those are the types of things that we're looking forward to in the future. All of that is underpinned by really a desire across our employee base to use technology. At this point, essentially, all of our office-based employees are using AI to help them with productivity gains. And we're right now on the very tip of what we call Wave 2 and Wave 3 is where you're implementing that AI in our work processes.

So a lot of momentum there, a lot of excitement across all of our organization to continue to move the ball down the field and everything is looking good.

Appreciate the color, guys. And then as you think about setting that CapEx budget for '26, you probably took a view on different product lines on the services side and just talk about -- we're trying to isolate the structural cost improvements, which you talked about in the answer to the first question versus more of the cyclical stuff. So can you talk about the service environment right now and which product lines you're seeing deflation and which ones which of the cost items you're seeing flat to inflation?

Neil, we feel really good about our positioning ahead of what could be a really challenging 2026. We look like -- the market is exceptionally well supplied, maybe even potentially oversupplied. And so as a kid that grew up on the Gulf Coast, we now have to prepare for a hurricane. And when the storm is coming, you make sure you get your balance sheet right. You got your operations really buckled down. You've got the teams focused on the right things. And then that helps drive through those troubling times.

So when I think about what could come from 2026 and how we think about this preliminary guide, we've taken out any assumptions of inflation or deflation really kind of timestamp where we're at today. We don't know where commodity prices are going to go in subsequent activities and therefore, subsequent deflation. So just consider that flat to where we're at today, and then we're prepared for whatever comes our way from a macro standpoint.

Our next question comes from Arun Jayaram with JPMorgan.

I was wondering if you could maybe elaborate on what you're doing to kind of manage your base production. You highlighted in the release that it's leading to maybe 20 MBOE per day of production uplift and a pretty meaningful improvement in cash flow from those efforts? And maybe talk about your views on the sustainability as we think about go forward 2026 beyond?

Thanks for the question, Arun. This, I think, is really important for us to spend a little time on. So I really appreciate the angle on this one. We it's pretty easy to quantify savings on that side of the equation. It's harder to quantify these wins, and we've been very clear from the beginning. This is not just a cost reduction program. This is a value enhancement program, and that should come on both sides of the leisure. This -- what you're talking about is more value enhancement. And I can be honest with you, it's really hard to measure how much downtime would we have had theoretically, how much are we gaining incrementally from the actions but that's exactly what this attempt is. We're trying to be exceptionally credible. At the same time, we know that this a hard number to precisely quantify. I'll ask John to dig in on a couple of things that we're doing to measure this, quantify this and then how we're seeing wins.

Yes, Arun. I appreciate the question. I think Clay hit it well. When you look at the full year, we've had a really strong production beat. And the first thing I would say on that is when you look at that production beat and you break it down, we certainly beat on our wedge. We've had some outperformance on our wells. So we've had a little bit of acceleration. But overall, the biggest part of that production beat comes from our base. And we feel that that's very measurable. Now we've got, I think, Clay said earlier, over 80 work streams on our business optimization. We've got a ton of these that go towards the base.

I'm going to talk about a few that I think have contributed the most this year. We've got a combination of technology and good blocking and tackling. I'll start with a project that I'm very proud of that we've deployed in the Delaware Basin really this deploys some next-generation technology. You've heard me talk about it before, but this is our smart gas lift project in the Delaware Basin. What we're seeking to do here is essentially to deploy AI models that continuously optimize the optimal rate of gas injection for gas lift wells that sit on centralized gas lift systems. This is a project that we piloted back in Q2. If we saw tremendous results here, we saw a 3% to 5% uplift -- and we talked about moving to a pilot, [ too ], on that. We saw a success that was so good that we've moved essentially into full deployment of that in the Delaware Basin, and we expect to be complete roughly by year-end on that.

The beauty of this project is we also have application in the Williston Basin, we have application in the Eagle Ford. And so this is going to be a project that's going to have ongoing sustainable results to our base production, and we're super excited about that.

Probably a couple of other projects I'll hit on, and Clay mentioned this in our opening remarks, but we've had a tremendous focus on workover optimization this year. I'd say this year, this really started last year. We're looking at every which way that we can get better on our workover operations from operational efficiency all the way to safety. We took advantage early in the year. We made some changes in the organization to focus on this. We've got leads that work together to look at best practices across our basins. And when you look at what we've done there operationally, we've looked at advanced KPIs to manage our rig fleet. We've looked at design optimization. We've looked at equipment standardization. And really, we've looked at planning optimization.

Not only have we been able to pull a ton of cost out of the system, but we've been able to lower the amount of time that we're spending on pad with these workovers. And essentially, what we've seen is we're getting our wells back quicker. And when we try to break down how much base contribution this had or the contribution to the base beat, we think it's over 2,000 barrels a day net production that we're seeing so far this year. And importantly, we think that's sustainable.

I think it may be the last example I'll provide. We've had a really tremendous focus on failure rate reduction and optimization. We've had this throughout the portfolio. I'll brag on the Rockies team a little bit here over the course of the last 18 months. We really looked at our artificial lift failures. We did some very intensive look backs on that front. We did some proactive redesign there. And when we look back at the reduction in failure rate, we're tracking towards something that's 25%. And so again, that's a good example of a project that takes cost out of the system, but it also increases our uptime pretty significantly. And so a lot of really good projects in the queue like that, but we think these are all importantly, very sustainable to the base production overall.

Maybe just a follow-up, your Rockies production has been trending maybe a little bit better than we had been modeling. In fact, if you look you grew your oil 7,000 barrels a day sequentially and you're relatively flat versus the 4Q 2024 number. So maybe talk to us a little bit about what's been driving that and maybe how the overall integration with Grayson Mill assets has been going.

Yes, I'll start with the integration of the Grayson Mill assets. That integration is roughly complete. It's gone really well. We've had a lot of bidirectional lessons learned there. Everything from midstream to the base operations to learning more and more about the reservoir, how to drill these wells, how to complete these wells. So I can't say enough good things about how that integration has gone.

When you talk specifically about the production, you're seeing a few things there. One, again, on the wedge, we're seeing well results that meet or exceed our expectation. And so we've continued to be very pleasantly surprised with the good production we've seen the good well results, especially as we focused on the western side of the play. But Neil -- or excuse me, Arun, a lot of what I just said around the base is really what's driving that sequential improvement. And I would say the Rockies team has really led the way on that artificial lift failure reduction that I talked about as a huge driver for us in the Rockies. And specifically, we've seen our workover rig count in the Rockies come down the most. And probably the biggest contribution to the base come from the Rockies. So really proud of the work they've done. And I can't emphasize enough how important that base uplift has been for us there.

Yes. Arun, I just want to [ dig ] on John's comments. As we talk about the workover rigs, especially, a lot of this motivation, I can tell you was around safety. The workover rigs was something the industry was really struggling with, and with this hyper focus, we found incremental value, cost savings, production efficiency and maybe most importantly, safety improvement as well. So really proud of all the teams that are working on that. And that's been kind of around the industry focus. So great progress on that. Thanks again for the questions, Arun.

Our next question comes from Neal Dingmann with William Blair.

[ I was late last quarter ]. Clay, my first question just on M&A. Specifically, I couldn't help but notice, I mean, you guys did a great job on the ground game being active on New Mexico lease sales. So I'm just wondering what that said, do you all anticipate the ground game such as this, maybe in New Mexico or other states around other plays continue to represent a significant portion of your M&A.

Thanks for the question, Neal. Yes, I would say this is very important. We've done a lot of this work quietly -- kind of on the backs of trades, 40 acres in, 40 acres out. I mean, just hard work every single day. That can be incredibly value creative. We've had some more opportunities with state lease sales and upcoming federal lease sales. That's definitely something we want to participate. We'll look at it objectively as we do all incremental investments. but really excited about that opportunity and definitely something we want to play an active role in. Clearly, we have -- and we think we have -- with the flywheel, the machine that we have running in the Delaware Basin, in particular, I think it's a great opportunity for us to leverage not just the skill sets, the momentum that the team has the technology, the benefit from the business optimization, all of those things, but also the mechanics of being there boots on the ground every single day has a great ability to scale. So we think we have every right to be on the front end of that and successful thus far.

Great. Great point. And then that leads me to my second question, Clay. I can't help but notice just how much you continue to advance the Delaware, not only just better wells, but you continue to recognize more resource just undeveloping kind of developing more rock. So I guess with that said and just how well you're doing there, does that caused you to think about it differently, maybe one of your other plays like the Anadarko or PRB, where you have less scale and [ one ] rig and I'd suggest investors are not giving you full credit. I mean why -- any thought about potentially reallocating, selling something and reallocate into [ the depth more ] or even more in the Delaware where you continue to see all this upside.

Yes, Neal, as you know, we look at this stuff all of the time. Our Board, this is an imperative that our Board has for us to be thinking about all of the art of the possible. And that certainly means we're not going to be in these 5 basins exactly as constructed for the indefinite future. objectively, we need to think about what's the right opportunity for us, for how these positions would fit given the market demands, but also thinking about what the opportunities are to continue to scale and grow and make sure that we've got a sustainable value-creating business going forward.

When you look back at the 50-plus year history of Devon, and I would say any organization that survived 50 years in this very tough business, man, we have reinvented ourselves a number of times along the way. We always will remain objective about what that could mean going forward. And again, this is regular conversations that we have with our Board as we should about thinking the longevity of creating long-term shareholder value. It's just fundamental to what we do.

Our next question comes from Doug Leggate with Wolfe Research.

Clay, I wonder if I could come back to the business optimization for a second. I think I've maybe been confused about something and I'm looking for some clarity. You have some of the legacy midstream contracts rolling off. But my understanding is it's beyond the timeline of the $1 billion target. So I'm thinking EnLink specifically. So can you tell us what's included in the remaining $400 million? And it sounds like there might be an upside case for that based on some of these longer-dated contracts. Sorry if I'm getting that wrong.

No, I think you're exactly right, Doug. I think there is upside. One of the things that we debated early, I can tell you the original construction from the team that was presented to Jeff and I as we're thinking about what could this look like? It was actually a 3-year look and that includes some other things that we know we're going to have and kind of year 3 of this opportunity. I can tell you there's additional wins in years 3, 4, 5 and for the foreseeable future. We've really focused on '25 and '26 wins. And as you pointed out, there are some really material specifically in the gas contract world, that comes out further than that. I'll ask Jeff to dig into some of those opportunities.

Yes, Doug, just to be clear. So in the business optimization guidance that we rolled out to get to the $1 billion of free cash flow starting in January of 2027. The bulk of that, that relates to the commercial opportunities is what we talked about in the previous quarters, which is reduced fees on gathering, processing, transportation and fractionation, most of that's on gas and NGLs, specific to the Delaware Basin. So the lion's share and bulk of that really resides in the Delaware. That's where you're going to get this incremental uplift, if you will, of the commercial opportunities that we highlighted specific to the $1 billion.

As Clay just said, 2027 and beyond, there'll be other opportunities across our portfolio where we could see some incremental benefit. But in the $1 billion, the real driver of that is what we're seeing in the Delaware, specific to our gas and NGL contracts.

That's very helpful. I guess it would be a bit of a stretch to ask you to quantify the upside at this point, but maybe that's for another call. My follow-up is a little self-serving, I'm afraid. And I just want to make sure I'm not misinterpreting or overstating this, but -- if I look back to the legacy commitment from -- when you were still COO, Clay, you used to talk about 70% of your free cash flow coming back to shareholders. It seems that your presentation deck has adjusted that a little bit to now include debt reduction in your shareholder returns. Is that the right interpretation? Because obviously, we're big fans of that. I just wanted to clarify with you if that's how you're thinking about it.

Yes, I appreciate that. I mean I think it is a fundamental piece of how we think about returning value to shareholders. And certainly, ahead of what could be a pretty choppy year in 2026, I think we want to make sure that we are thinking about debt, debt structure, how we capitalize the company and that we're prepared for anything that comes ahead. So there was an opportunity for us to take the $485 million down. We certainly consider that part of, again, returning cash in various forms to shareholders. And obviously, we had an illustration this time that included that -- so yes, I appreciate your support over the years for debt reduction. This is a very -- it's a challenging business. We think the more that you can be prepared for the storms the storms turn into real opportunities. And I think that's where Devon is positioned today that when these challenges come ahead, we're going to be front footed and on the -- have an opportunity to really be to turn them into a value-creating opportunity rather than just a defensive posture.

Sounds like an M&A question, Clay, but I'll leave it there. Thanks very much indeed.

Thank you, Doug. Appreciate it.

Our next question comes from Scott Gruber with Citigroup.

I want to come back to the production optimization bucket. Great [ gains ] there. I think that the bulk of that effort hits production and, therefore, a reduction in your maintenance CapEx needs I think there's also an LOE benefit as well. How does that split? And we see your LOE rolling lower? How should we think about LOE costs in '26?

Yes, Scott, that's a great question. And it is -- this manifests in a few different categories and some of them are cost reductions. As you mentioned, LOE, we've seen a significant improvement quarter-over-quarter. We'll continue to see benefits there. It shows up obviously in the maintenance capital requiring us to drill fewer wells. I think our original plan versus the plan we're executing now, we're actually drilling 20 fewer wells this year because of these kind of benefits essentially lowering that burden of maintenance capital and as a side benefit, prolonging the really high-quality portfolio that we have. I might ask John to see if he has anything else to add to that.

Yes, as we originally contemplated this. You're absolutely right. There's a component of our production optimization target that's LOE. There's a component that is a production uplift. There's even a little bit there that is pulling capital out of the system. Well, I'll tell you right now, is the way that we're looking at the $150 million, that's essentially all of the production uplift at this point in time. We have had some success on LOE over the course of the year. I think if you look back to Q1, you break it out from the number we disclosed, LOE plus [ GP&T ], we're sitting about $6.50 a barrel I want to say this quarter, we're sitting just above $6.10 a barrel, so about a 6% improvement year-over-year. LOE is pretty sticky, and it lags. So as we go into 2026, we expect ongoing reductions on LOE, and you'll see more LOE contribution show up within production optimization. But essentially, what we're taking credit for up to this point is that base uplift that I mentioned earlier.

I appreciate that color. And with the efforts reducing your well count needs, how do we think about the [ TIL ] count that's embedded in your '26 preliminary guide here?

Yes. I think that's obviously contemplated as we get both more efficient on how quickly we can execute drilling, completion, building facilities and then the effectiveness of those completions and how they contribute. Again, we're in a base capital mode -- excuse me, a base oil production mode and the lower maintenance capital is certainly reflected by that preliminary [ $3.6 ] billion guide, which again is a substantial improvement from where we were 12 months ago when we were providing a preliminary guide for 2025. So we are winning significantly on that. That's showing up in the numbers. I continue to be encouraged by the work that we're doing and the great efforts of the team and how this is showing up and will continue to show up in time.

[ That should ] keep me think about the '25 [ TIL ] count kind of less 20 as a starting point for '26? Is that fair?

Look, I don't know if we want to get into details of that. But here's what I would tell you is take the preliminary guide, start with the numbers that we're guiding on 2025 as of today. And I think that's a good kind of relative application and allocation. Again, we've mentioned no additional deflation is baked in. So I think that's a good starting point for assumptions. And then obviously, when we come back to you early in the year with firm guidance, we'll have a lot more details to share with you then.

Our next question comes from Kevin MacCurdy with Pickering Energy Partners.

Kind of going back to M&A. There's been a lot of industry interest in the Anadarko and specifically M&A in the Anadarko. And maybe a 2-part question there. I mean being located there in Oklahoma, what do you make of the interest in that basin? And what do you think is driving kind of the renewed interest? And just the level of interest kind of make you reconsider your -- the Anadarko's place in your portfolio?

Yes, Kevin, I would say on the first question, obviously, it's gas oriented. It's positioned well. It's not backed up behind Waha. So there's some structural advantages of the Mid-Continent, the Anadarko Basin that we benefit from today. And certainly, we're very aware of that, and we take great pride in that. I'll go back to my earlier comments. We consider everything all the time. Our Board is very inquisitive and very thoughtful about how do we build the right term -- right long-term shareholder opportunity value set. How do we think about the portfolio. You have to remember, we're always consuming the front end of our portfolio. So how are we backfilling with quantity and quality of the portfolio to make sure that we have a very substantial and solid tenure runway in front of us all of those things are considered. And so as markets change and we see other things, we have interest, we have interest and other things. All of that certainly comes into play, but no additional details to share with you on that today. But I appreciate you asking.

Got you. And then as a follow-up, I really like the detail on Slide 9. I think that highlights the value creation that you've that you've had that doesn't always kind of show up in the production numbers. I guess a question on Water bridge. Is there any operational reasons that you would keep that equity interest?

Yes, Kevin, I'd probably put it in the same category. We've done a lot of deals kind of adjacent to our core business. Think about something like Matterhorn where we entered that opportunity. The key there was really specific to Matterhorn, making sure that we had gas takeaway from the basin. That was the phenomenal or the fundamental importance that we did. By underwriting that, we ensured that, that pipe was built -- we have a significant position on that. We've retained that volume on the pipe. We also benefited from an equity position. We made a very, very substantial return on that. We're very proud of that. But again, the objective was making sure that, that pipe was built and making sure that we had our ability to get our gas to market.

Similarly, with WaterBridge, the main objective there is making sure that we're thinking a lot about a super system -- we [ reserved ] poor space. That's very proactive in our industry. John will probably tell you a little bit more about that when I hand it to him. But I can tell you, the really fundamental and important piece of this was to make sure that we have our water taken care of in the Delaware Basin and through this JV, this partnership, we've secured that. Now as a very beneficial byproduct, we have a substantial ownership in a publicly traded entity. That's done very well. There's no reason we have to hang on to it by the same token, it's a great investment. And I would tell you, we're not we have to sell either in that position. So it's option value for us. We have a lot of that in our organization, and we continue to evaluate that just as we do with other things in our portfolio -- in this regular part of the conversation we have with our Board.

John, anything else you want to add?

Clay, I think you covered it really well. I would say the relationship there remains very important to us. Operationally, we work with those guys every day. We've got a very multifaceted water management effort in the Delaware Basin. That's both to manage costs but manage future risk associated with water. I've talked about this before on our calls, but our first call on water is always to go to recycle. We've got a big recycle operation in the basin. In New Mexico, we've got a large water midstream presence. We probably don't talk about enough. That gives us a lot of flexibility there. We've got a lot of strategic offloads. Many of those offloads are WaterBridge. And then when you get into Texas, we really leverage our WaterBridge relationship to give us diversity of options across the play there. So we feel really good about how that's working operationally.

Our next question comes from Kalei Akamine with Bank of America.

I want to start with the Wolfcamp B drilling program for this year and maybe this one is for John. So production in the Delaware has been holding up quite well this year. Can you kind of compare how the Wolfcamp B results are comparing to your expectations? And then for 2026, do you anticipate this [ zone ] comprising a similar proportion of the program?

Kalei, appreciate the questions. I would say Wolfcamp B is performing very well relative to our expectations for the year. You've probably heard me mention this on the last call. When you look at 2025, we've got a very diversified program as far as the zones that we're targeting for the full year. We're looking at about 30% Wolfcamp B or Deep Wolfcamp, about 30% Upper Wolfcamp, about 30% Bone Spring and the remainder in the Avalon. What you're really seeing, you're going to see some volatility in terms of zone mix each quarter. A lot of our Wolfcamp B wells have come on in the first quarter and really the first half of the year. So we've had a little bit of a run at seeing how those wells are performing. And generally speaking, I'd say there mostly meeting our expectations with quite a few of those wells beating our expectations.

What I think you can expect from us going forward, for 2026, it's too early to get in and talk specifically about zone mix throughout the year. But I think Clay said earlier, you can expect some stability, some consistency in how we're thinking about our overall Delaware program. And as we shifted more into this multizone co-development, from a well productivity standpoint, we took that trade-off to go a little bit lower this year in exchange for better NPV overall and for a longer inventory runway. But I think you can expect that well productivity to be very consistent going forward for the next couple of years.

Yes. And if I could add, I'm going to ask Tom just to add a little bit more about our D&C efficiency that we continue to see in the Delaware Basin. I mean, I think it's very important as we think about all of these additional zones, the Wolfcamp B is just a touch deeper. But as we start expanding to the geographic edges and up and down the zone, so to speak, that efficiency really contributes as well. So Tom, just maybe a little bit on how we're thinking about on the efficiency gains there?

Yes, Clay. It's been really interesting this year. We've been really leaning into benchmarking in the Delaware Basin and using the AI tools on top of that. We have both AI tools that help us on sort of the new school where we can predict use the AI to look at the parameters, the drilling parameters that really help us predict how to drill faster on the current well. And we're even using AI tools right now to help us trip faster and drill curves faster and even running [ casing ] faster, all about 30% faster. Each one of those saves us millions of dollars. And now in the Delaware Basin, we have a new record at about 1,800 feet per day. That really screens well versus all of our fastest peers. Clay, it's looking really good. And I think the AI tools and the benchmarking is really coming through for us.

That's awesome. I appreciate that detailed answer. My follow-up is on the lease sales. So yesterday, that sale was a state sale, but this presidential administration has put federal resales back on the table, and they should occur with a pretty steady cadence. How are you guys thinking about those? And do you anticipate that being a part of your cash allocation priorities for '26?

Yes, great question. And I think as I mentioned earlier, I think this is something we should be able to compete exceptionally well. We've got an existing footprint. The momentum of the organization. The efficiencies Tom was just talking about around D&C, the infrastructure that we have, including WaterBridge the relationships that we have with the gas midstream partners and then, of course, the existing infrastructure of the people applying this business optimization, the technology puts us in a really good position to be super competitive. So when we look at those, you bet, we'll be participating in the process. There are some really interesting land. We're thrilled to have the BLM open up some of these opportunities. And there's some pretty material lease sales coming up. So yes, we -- as we've shown on the last lease sale, we want to be part of the process. And at the same time, we want to be very objective about how do we create value, full cycle value from these opportunities.

So yes, count us in as part of the process. And as long as alongside everything that we're doing on the ground game, including trades, small acquisitions, ground floor leasing and all the basins we're doing. We just see a real interesting opportunity coming in the Delaware. So definitely leading in that direction.

We have no further questions. And so I'd like to turn the call back over to Chris for closing comments.

Yes. Thank you for your interest in Devon today. If there are any further questions, please reach out to the Investor Relations team. Have a good day. Thanks.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.