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WPX Energy, inc (WPX) Q2 2021 Earnings Call Transcript

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WPX Energy, inc (NYSE: WPX)
Q2 2021 Earnings Call
Aug 4, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Devon Energy's Second Quarter Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Mr. Scott Coody, Vice President of Investor Relations. Sir, you may begin.

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Scott Coody -- Vice President, Investor Relations

Good morning and thank you to everyone for joining us on the call today. Last night we issued an earnings release and presentation that cover our results for the quarter and our forward-looking outlook. Throughout the call today, we will make references to our earnings presentation to support our prepared remarks. And these slides can be found on our website.

Also joining me on the call today are Rick Muncrief, our President and CEO; Clay Gaspar, our Chief Operating Officer; Jeff Ritenour, our Chief Financial Officer and a few other members of our senior management team.

Comments today will contain plans, forecasts, estimates and forward-looking statements under US Securities Law. These comments are subject to assumptions, risks and uncertainties that could cause actual results to differ from our forward-looking statements. Please take note of the cautionary language and risk factors provided in our SEC filings and earnings materials.

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

Rick Muncrief -- President and Chief Executive Officer

Thank you, Scott. We sincerely appreciate everyone taking the time to join us this morning on the webcast. Devon's second quarter can best be defined as one of comprehensive execution across every element of our disciplined strategy that resulted in expanded margins, growth in free cash flow and the return of significant value to our shareholders through higher dividends and the reduction of debt. Following our transformative merger that closed earlier this year, I'm very pleased with the progress our team has made and our second quarter results demonstrate the impressive momentum our business has quickly established. Even today as we celebrate Devon's 50th anniversary as a company this year, we're only getting started and our talented team is eager energized and extremely motivated to win. As investors seek exposure to commodity-oriented names, it is important to recognize that Devon is a premier energy company and a must own name in this space. We have the right mix of assets, proven management, financial strength and a shareholder friendly business model designed to lead the energy industry in capital discipline and dividends.

Now turning to Slide 4. The power of Devon's portfolio was showcased by our second quarter results as we continue to deliver on exactly what we promised to do both, operationally and financially. Efficiencies drove capital spending 9% below guidance. Strong well productivity resulted in production volumes above our midpoint. The capture of merger related synergies drove sharp declines in corporate cost. These efforts translated into a six-fold increase in free cash flow from just a quarter ago and with this excess cash we increased our dividend payout by 44% and we retired $710 million of low premium debt in the quarter. Now, Jeff will cover the return of capital to shareholders in more detail later. But investors should take note this systematic return of value to shareholders is a clear differentiator for Devon.

Now moving to Slide 5. While I'm very pleased with the results our team has delivered year-to-date, the set up for the second half of the year is even better with our operations scale to generate increasing amounts of free cash flow. This improved outlook is summarized in a white-box at the top left of this slide. With the trifecta of an improving production profile, lower capital and reduced corporate cost, Devon is positioned to deliver an annualized free cash flow yield in the second half of the year of approximately 20% at today's pricing. I believe it is of utmost importance to reiterate that even with this outstanding free cash flow outlook, there is no change to our capital plan this year.

Turning your attention to Slide 7. Now with this powerful stream of free cash flow, our dividend policy provides us the flexibility to return even more cash to shareholders than any company in the entire S&P 500 Index. To demonstrate this point, we've included a simple comparison of our annualized dividend yield in the second half of 2021, assuming a 50% variable dividend payout. As you can see Devon's implied dividend yield is not only best-in-class to E&P space, but we also possess the topline yield in the entire S&P 500 Index by a wide margin. In fact, at today's pricing, our yield is more than 7 times higher than the average company that is represented in the S&P 500 Index. Furthermore our dividend is comfortably funded within free cash flow and its accompanied by a strong balance sheet that is projected to have a leverage ratio of less than 1 turn by year-end. investors need to take notice, Devon offers a truly unique investment opportunity for the near-zero interest rate world that we live in today.

Now looking beyond Devon to the broader E&P space. I'm also encouraged this earning season, by the announcement from Pioneer on their variable dividend implementation as well as a growing number of other peers who have elected to prioritize higher dividend payouts. These disciplined actions will further enhance the investment thesis for our industry, paving the way for higher fund flows as investors rediscover the attractive value proposition of the E&P space.

Now moving to Slide 10. While the remainder of 2021 is going to be outstanding for Devon, simply put, the investment thesis only gets stronger as I look ahead to next year. We should have one of the most advantaged cash flow growth outlooks in the industry as we capture the full benefit of merger related cost synergies restructuring expenses roll-off and our hedge book eventually improves. At today's prices, these structural tailwinds could result in more than $1 billion of incremental cash flow in 2022. To put in perspective, this incremental cash flow would represent cash flow per share growth of more than 20% year-over-year if you held all other costs of -- all other factors constant.

Now, while it's still too early to provide formal production and capital targets for next year, there will be no shift to our strategy. We will continue to execute on our financially driven model that prioritizes free cash flow generation. Given the transparent framework that underpins our capital allocation, our behavior will be very predictable as we continue to limit reinvestment rates and drive per share growth through margin expansion and cost reductions. We have no intention of adding incremental barrels into the market until the demand side fundamentals sustainably recover and it becomes evident that OPEC plus spare oil capacity is effectively absorbed by the world markets. The bottom line as we are unwavering in our commitment to lead the industry with disciplined capital allocation and higher dividends.

And with that I will now turn the call over to Clay to cover some of the great operational results we delivered in the past quarter.

Clay Gaspar -- Executive Vice President and Chief Operating Officer

Thanks Rick, and good morning everyone. As Rick touched on from our operations perspective, Devon continues to deliver outstanding results. Our Q2 results demonstrate the impressive operational momentum we established in our business, the power of Devon's asset portfolio and the quality of our people delivering these results. I want to pause and congratulate the entire Devon team for the impressive work overcoming the challenges of the pandemic and the merger, while not only keeping the wheels on, but requestioning everything we do and ultimately building better processes along the way. We've come a long way on building the go-forward strategy, execution plan and culture, and I see many more significant wins on the path ahead.

Turning your attention to Slide 12. My key message here is that we're well on our way to meeting all of our capital objectives for 2021. At the bottom left of the slide, you can see that my confidence in the '21 program is underpinned by our strong operational accomplishments in the second quarter. With activity focused on low-risk development, we delivered capital spending results that were 9% below plan, well productivity in the Delaware drove oil volumes above guidance and field level synergies improved operating costs. While the operating results year-to-date have been great, the remainder of the year looks equally strong. A true test of asset quality, execution and corporate cost structure proves out in sustainably low reinvestment rates, steady production and significant free cash flow. This is exactly what we're delivering at Devon. We plan to continue to operate 16 rigs for the balance of the year and deliver approximately 150 new wells to production in the second half of 2021.

Now let's turn to Slide 13, where we can discuss our world-class Delaware Basin asset, which is the driving force behind Devon's operational performance. During the quarter, our capital program consisted of 13 operated rigs and four dedicated frac crews resulting in 88 new wells that commenced first production. This level of capital activity was concentrated around the border of New Mexico and Texas and accounted for roughly 80% of our total companywide capital investment in the quarter. As a result of this investment, Delaware basins high-margin oil production continue to rapidly advance growing 22% on a year-over-year basis.

While we had great results across our acreage position, a top contributor to the strong volume were several large pads within our Stateline and Cotton Draw areas, that accounted for more than 30 new wells in the quarter. This activity was weighted toward development work in the Upper Wolfcamp, but we also had success co-developing multiple targets in the Bone Spring within our Stateline area. The initial 30 day rates from activity at Stateline and Cotton Draw average north of 3,300 Boe per day and recoveries on track to exceed 1.5 million barrels of oil equivalent. With drilling and completion costs coming in at nearly $1 million below pre-drill expectations, our rates of return at Cotton Draw and Stateline are projected to approach 200% at today's strip pricing. While we've all grown weary of quoted well returns, this is the best way that I can provide insight to you on what we're seeing in real time and what will be flowing through the cash flow statements in the coming quarters.

While we lack precision in these early estimates, I can tell you, these are phenomenal investments and will yield significant value to the bottom line of Devon and ultimately to the shareholders through our cash return model. And lastly, on this slide, I want to cover the recent Bone Spring appraisal success that we had in the Potato Basin with our three well Yukon Gold Project. Historically we focused our efforts in the Wolfcamp formation in this region and Yukon was our first operated test in the second Bone Spring interval in this area. Given the strong results from Yukon plus additional well control from non-operating activity, this will be a new landing zone that works its way into the Delaware Basin capital allocation mix going forward. This is another example of how the Delaware Basin continues to give. This new landing zone required no additional land investment, very little incremental infrastructure and as a result the well returns have a direct path to the bottom line of Devon.

Moving to Slide 14. Another highlight associated with the Delaware Basin activity was the improvement in operational efficiencies and the margin expansion we delivered in the quarter. Beginning on the left hand side, our D&C costs have improved to $543 per lateral foot in the quarter. A decline of more than 40% from just a few years ago. To deliver on this positive rate of change, the team achieved record setting drill times in both Bone Spring and Wolfcamp formations with spud release times and our best wells improving to less than 12 days. Our completions work improved to an average of nearly 2,000 feet per day in the quarter. I want to congratulate the team and I fully expect that these improved cycle times will be a tailwind to our results for the second half of the year.

Shifting to the middle of the slide. We continue to make progress capturing operational cost synergies in the field. With solid results we delivered in the second quarter LOE and GP&T costs improved 7% year-over-year. To achieve this positive result, we adopted the best and most economic practices from both legacy companies and leveraged our enhanced purchasing power in the Delaware to meaningfully reduce costs associated with several categories, including chemicals, water disposal, compression and contract labor. Importantly, these results were delivered by doing business in the right way with our strong safety performance in the quarter and combined with company delivered some of the meaningful environmental improvements over year-over-year basis.

And my final comment on this slide on the chart to the far right, the cumulative impact of Devon's strong operational performance resulted in significant margin expansion compared to both last quarter and on a year-over-year basis. Importantly, our Delaware Basin operations are geared for this trend to continue over the remainder of the year and beyond.

Moving to Slide 15. While the Delaware Basin is clearly the growth engine of our company, we have several high-quality assets in the oil fairway of the US that generate substantial amounts of free cash flow. These assets not only captured many headlines but they underpin the success of our sustainable free cash flow generating strategy. In the Delaware Basin, cash flow nearly doubled in the quarter on the strength of natural gas and NGLs. Our Dow joint venture active -- activity is progressing quite well and we're bringing on the first pad of new wells this quarter. The Williston continues to provide phenomenal returns and at today's pricing, this asset is on track to generate nearly $700 million of free cash flow for the year. In the Eagle Ford, we have reestablished momentum with 21 wells brought online year-to-date resulting in second quarter volumes advancing 20%. And in the Powder River, we're encouraged with continued industry activity and how -- in evaluating how we create the most value from this asset. We have a created and commercially focused team working this asset, many of which bring fresh set of eyes on how we approach this very substantial oil-rich acreage position. Overall, another strong quarter of execution and each of these asset teams do a great job delivering within our diversified portfolio.

And lastly, on Slide 16, I want to conclude my prepared remarks with a few thoughts on the environmental performance targets we recently published. The team here at Devon takes great personal pride in delivering affordable and reliable energy that powers every other industry out there as well as the incredible quantity and quality of life we appreciate today. We absolutely believe that in addition to meeting the world's growing energy demand, we must also deliver our products in an environmentally and commercially sustainable way. As you can see with the goals outlined on this slide, we're committing to taking a leadership role by targeting to reduce greenhouse gas emissions by 50% by 2030 and achieving net zero emissions for Scope 1 and 2 by 2050. A critically important component of this carbon reduction strategy is to improve our methane emissions intensity by 65% by 2030 from a baseline 2019. This emissions reduction target involves a range of innovative -- innovations, including advanced remote leak detection technologies and breakthrough designs like our latest Low-E facilities in the Delaware Basin. We also plan to constructively engage with upstream and downstream partners to improve our environmental performance across the value chain. While it's a journey, not a destination, environmental excellence is foundational to Devon.

With that, I'll turn the call over to Jeff for the financial review.

Jeff Ritenour -- Executive Vice President and Chief Financial Officer

Thanks, Clay. My comments today will be focused on our financial results for the quarter and the next steps in the execution of our financial strategy. A great place to start today is with the review of Devon's strong financial performance in the second quarter, where we achieved significant growth in both operating cash flow and free cash flow. Operating cash flow reached $1.1 billion, an 85% increase compared to the first quarter of this year. This level of cash flow generation comfortably exceeded our capital spending requirements resulting in free cash flow of $589 million for the quarter. As described earlier by Rick and Clay, our improving capital efficiency and cost control drove these outstanding results along with the improved commodity prices realized in the second quarter. Overall, it was a great quarter for Devon and these results showcase the power of our financially driven business model.

Turning your attention to Slide 6. With the free cash flow generated in the quarter, we're proud to deliver on our commitment to higher cash returns through our fixed plus variable dividend framework. Our dividend framework is foundational to our capital allocation process, providing us the flexibility to return cash to shareholders across a variety of market conditions. With this differentiated framework, we've returned more than $400 million of cash to our shareholders in the first half of the year, which exceeds the entire payout from all of last year.

The second half of this year is shaping up to be even more impressive. This is evidenced by the announcement last night that our dividend payable on September 30 was raised for the third consecutive quarter to $0.49 per share. This dividend represents a 44% increase versus last quarter and is more than a four-fold increase compared to the period a year ago.

On Slide 8. In addition to higher dividends, another way we've returned value to shareholders is through our recent efforts to reduce debt and enhance our investment grade financial strength. In the second quarter, we retired $710 million of debt, bringing our total debt retired year-to-date to over $1.2 billion. With this disciplined management of our balance sheet, we're well on our way to reaching our net debt-to-EBITDA leverage target of 1 turn or less by year-end. Our low leverage is also complemented by a liquidity position of $4.5 billion and a debt profile with no near-term maturities. This balance sheet strength is absolutely a competitive advantage for Devon that lowers our cost of capital and optimizes our financial flexibility through the commodity cycle.

Looking ahead to the second half of the year, with the increasing amounts of free cash flow our business is projected to generate, we will continue to systematically return value to our shareholders through both higher dividend payouts and by further deleveraging our investment grade balance sheet. As always, the first call in our free cash flow is to fully fund our fixed dividend of $0.11 per share. After funding the fixed dividend up to 50% of the excess free cash flow in any given quarter will be allocated to our variable dividend. The other half of our excess free cash flow will be allocated to improving our balance sheet and reducing our net debt. Once we achieve our leverage target later this year, this tranche of excess free cash flow that was previously reserved for balance sheet improvement has the potential to be reallocated to higher dividend payouts or opportunistic share buybacks should our shares remain undervalued relative to peers in the broader market.

So in summary, our financial strategy is working well. We have excellent liquidity and our business is generating substantial free cash flow. The go-forward business will have an ultra-low leverage ratio of 1 turn or less by year-end and we're positioned to substantially grow our dividend payout over the rest of the year.

With that, I'll now turn the call back over to Rick for some closing comments.

Rick Muncrief -- President and Chief Executive Officer

Thanks, Jeff. Great job. I would like to close today by reiterating a few key thoughts. Devon is a premier energy company and we are proving this with our consistent results. Our unique business model is designed to reward shareholders with higher dividend payouts. This is resulting in a dividend yield that's highest in the entire S&P 500 Index. Our generous payout is funded entirely from free cash flow and backstopped by an investment grade balance sheet. And our financial outlook only improves as I look to the remainder of this year and into 2022. With the increasing amounts of free cash flow generated, we are committed to do an exactly what we promised and that is to lead the industry in capital discipline and dividends.

And with that I will now turn the call back over to Scott for Q&A.

Scott Coody -- Vice President, Investor Relations

Thanks, Rick. We will now open the call to Q&A. Please limit yourself to one question and a follow-up. This allows us to get to more of your questions on the call today. With that operator, we'll take our first question.

Questions and Answers:

Operator

Your first question is from Doug Leggate with Bank of America.

John Abbott -- Bank of America -- Analyst

Good morning. This is John Abbott on for Doug Leggate. Thank you for taking our questions. The first question is on M&A. There has been some recent press speculation out there that you are the potential bidder in a process, recognizing that you probably won't comment on any ongoing potential transaction, could you just sort of discuss in general, what you would see as the benefits to Devon of a large scale acquisition given the running room that you already have from legacy Devon and from WPX?

Rick Muncrief -- President and Chief Executive Officer

Yes, John, thanks for the question. It's a great question, great perspective. Just fundamentally, we continue to have a very, very high bar and we have a wonderful business post merger. And so for us, the way we think about it is anything we evaluate and that's really on the buying or selling side is got to be immediately accretive. It's got to have compelling industrial logic and we have tried to be really clear ideas, but it absolutely has to be within our investment framework and makes us even better, even stronger.

I'll just go back to just a fundamental message today, it's a -- it's got anything we have to consider has got to help us get stronger on an outlook that says, look if we just keep volumes flat, we're going to add an additional billion dollars of cash flow next year. And then when you look at on a cash flow per share by just 20% growth '22 over '21. So that's really how we view it. And that hasn't really -- for a change we've got a tremendous inventory. We've got a tremendous business and we continue to have a very high bar and we're going to be very, very disciplined on anything we do.

John Abbott -- Bank of America -- Analyst

Appreciate it. And then for our follow-up question here. Just on your hedging strategy going forward here. I mean you've historically had a systematic component to your hedging strategy. How are you thinking about hedging going forward from here?

Rick Muncrief -- President and Chief Executive Officer

Yes, I'm going to have Jeff answer that.

Jeff Ritenour -- Executive Vice President and Chief Financial Officer

Yes, this is Jeff. Yes, happy to provide some color on that. As you probably saw in our prepared materials in what we disclosed last night, we've not added any material incremental hedges since our last call since last quarter. Going forward, we don't expect that to change. Given where we are in the cycle, given where we are with our business, the balance sheet, the great shape that we have the balance sheet in, the low reinvestment ratios that we talked about which we expect to continue going forward and frankly, just the low cost structure and breakevens that we have, it's created a margin of safety for us in our business that allows us to be less aggressive on the hedging front. And so we really don't feel the need to add any incremental hedges at this point in time. We'll obviously monitor that and we certainly talk about and debate it on a weekly basis here within the walls of Devon and it could certainly change our view at some point in the future. But where we sit today, given the strength of our business and projected business and the balance sheet, we really don't feel like we need to add any incremental hedges in the near term.

John Abbott -- Bank of America -- Analyst

Thank you for taking our questions on a great quarter.

Rick Muncrief -- President and Chief Executive Officer

Okay, thanks.

Operator

Your next question is from Brian Downey with Citigroup.

Brian Downey -- Citigroup -- Analyst

Hey, good morning and thanks for taking the questions. Jeff, it sounds like from your prepared comments, raising the 50% excess free cash flow payout cap maybe considered at some point given the leverage and maturity schedule outlook here. You mentioned it but share repurchases still look to the bottom of your free cash flow priorities slide in the appendix. Has that repurchase appetite changed much at all on the margin, given the recent equity performance versus commodity price and Devon's forward yield on offer. And if you were to consider repurchases, do you anticipate that being more systematic or opportunistic?

Jeff Ritenour -- Executive Vice President and Chief Financial Officer

Yes, Brian, appreciate the question. I would say the share repurchases is certainly moving up the list of options for us, potential options for us as we move through the back half of this year. I talked about in my prepared remarks, and we've talked about it for a couple of quarters now. Our first focus is on reaching our leverage target, which you all have heard me speak to in the past. We really think about that on $55 oil price. And so if you do the math on $55 oil and our current oil production, you get to somewhere around a $4.8 billion -- $4.5 billion -- $4.8 billion EBITDA. We currently have $6.5 billion of gross debt. Cash balance of $1.5 billion. We need a couple of hundred million more dollars of cash to get us to that net debt of kind of a 1 times ratio. I really expect that's going to happen in this quarter and as I mentioned in our prepared remarks, that puts us in a position to think about other ways to return more of that excess free cash flow to shareholders. And so things on the table are absolutely an increase in the variable dividend percentage. We're going to maintain the framework that we've outlined. I don't expect that to change going into the future, but we can absolutely supplement it with some incremental variable dividends and potentially some incremental share repurchases. I think the other thing we'll look at as we get further into the year and probably into 2022 is the potential to increase the fixed dividend as well. So those are all the things that we'll be considering with our Board as we move into the back half of this year.

Brian Downey -- Citigroup -- Analyst

Great. And then maybe one for Clay. Clay in the Anadarko Basin, you mentioned bringing online half dozen or so legacy Meramec DUCs. Anything you're seeing from those production result completion costs or early days of the drilling JV that may be changes your view of Anadarko returns or how it ultimately fits within the portfolio?

Clay Gaspar -- Executive Vice President and Chief Operating Officer

Yes, Brian, just between you and I, I'm actually pretty positive on the Anadarko Basin. I have been for quite a while. I think it's under-appreciated generally speaking, but it's a pretty tough hill to climb to compete in our investment portfolio. So I think the team there is taking exactly the right approach. We've entered this joint venture, we've got some promoted money. It allows the investments to compete, feel really good about the investments that we're making. And then, meanwhile, we're doing exactly what you're asking about is, we're getting a modern look at today's well cost, today's completion designs and the well results that we're generating. So still pretty early days on the well results. But I'm very encouraged. The Miller Miller pad is the one we're bringing on this quarter, as a first ones that we've drilled this year bringing on that's really exciting. Looking forward to those opportunities both Woodford and Meramec opportunities, but I can tell you this, the well costs are phenomenal. Really excited about that and as you know $1 saved on well cost is a direct dollar to present value. So it's a holistic work and we look forward to seeing more from that team.

Brian Downey -- Citigroup -- Analyst

Okay. Appreciate the comments.

Clay Gaspar -- Executive Vice President and Chief Operating Officer

Thanks.

Operator

Your next question is from Nitin Kumar with Wells Fargo.

Nitin Kumar -- Wells Fargo -- Analyst

Hi, good morning gentlemen and thanks for taking my question. Rick, I appreciate I guess the early look into 2022, but if I can, what is your planning deck, the commodity price deck for 2022? And should we expect given the efficiencies in the Delaware for that to still be the workhorse in terms of the capital equivalent?

Rick Muncrief -- President and Chief Executive Officer

Yes, I'm going to have Jeff weigh in and help me on building the question and appreciate them. Yes, I think the Delaware is going to continue to be the workhorse in our portfolio. I don't see that changing. As Clay just talked about, we've got some great investment opportunities in our other basins. But the reality is the Delaware is really, really hard to compete with internally and so you'll continue to see the lion's share of our capital program being allocated to the Delaware Basin. Don't see that really changing anytime in the near future. So, Jeff, you may want to talk about commodity price assumptions that we have -- we're planning.

Jeff Ritenour -- Executive Vice President and Chief Financial Officer

Yes, I appreciate the question. And as you might guess, we look at multiple sensitivities and evaluate different scenarios and price decks that might come at us. I would say foundationally though, we really think about $55 oil is going to be in a normalized price and then try to manage our business around that. We're in a position today with the low breakevens that we have in our business, even at $55 oil, we can accomplish all of our financial objectives. And then so we feel like we're in a really good spot. But we certainly do evaluate the strip and even higher and even lower price scenarios as we work through our budgeting process with our Board.

Nitin Kumar -- Wells Fargo -- Analyst

Okay. Thanks for the color guys. And then my follow-up, you were 9% below expectations on capital spending in the second quarter. You are expecting an improvement in the rest of the year, but you left capital budget for 2021 unchanged. If I could -- is that a function of any inflation that you are seeing or could you just help us understand that -- the math there?

Clay Gaspar -- Executive Vice President and Chief Operating Officer

Yes, thanks. This is Clay, I'll respond to that Nitin. I think the idea is that we've set a course for capital. I think we are still very much inside the planned activity levels. In fact, we've accelerated a little bit just from drilling faster. We're not going to drop rigs and bounce activity because of that. And so what it does, it draws a little bit more natural activity into the fourth quarter. But that said, I think as -- I think you can kind of continue to see a very line of sight runway, I think there will be some continued improvements. I think we will also see some headwind from inflation start to creep in. I think on balance, I still feel good, really good about reiterating the '21 capital plan and we'll see how the team continues to perform throughout the year.

Nitin Kumar -- Wells Fargo -- Analyst

Great, thanks.

Rick Muncrief -- President and Chief Executive Officer

You bet. Thank you Nitin.

Operator

Your next question is from Neil Mehta with Goldman Sachs.

Neil Mehta -- Goldman Sachs -- Analyst

Thanks team. The first question is just, is more tactical. As we think about Q3 and all the moving pieces with most of the quarter at this point done from a realized price perspective, how should we think about the dividend, the variable dividend recognizing it as a Board decision. But can you talk about the moving pieces around price realizations, gas NGLs, and then capital and cost. Should we -- as based on what we know now, is it fair to assume that the variable dividend is likely to be higher next quarter than it was this quarter?

Jeff Ritenour -- Executive Vice President and Chief Financial Officer

Yes, absolutely, Neil. That's exactly right. I mean, given the strength that we've seen in pricing thus far, and as Clay mentioned earlier, the capital efficiencies that we've seen in continued cost reductions, you marry that with the fact that we've got incremental hedges rolling off into the third and fourth quarter, all of those are going to be tailwinds to our free cash flow in the quarter and my absolute expectation is to see higher variable dividend in the third quarter on a relative basis.

Neil Mehta -- Goldman Sachs -- Analyst

Okay.

Rick Muncrief -- President and Chief Executive Officer

And Neil this is Rick, I'll augment a little bit. I think we need to just remind everyone that we were about 50% hedged on crude this year, but the profile of that is about 60% first half, 40% the second half and currently we're about 20% hedged as we look into '22.

Neil Mehta -- Goldman Sachs -- Analyst

That's great Rick. And just the follow-up here is, as you guys think about the payout, which right now is 50%. I think the bread crumbs will indicate that you think there is a pathway to move that higher. Can you just talk about what the milestones we should be watching for, to see when we should start to think about taking up that payout ratio from 50% to something higher. And any sense of what the ultimate destination would be in a dreamworld of what the right payout ratio could look like?

Jeff Ritenour -- Executive Vice President and Chief Financial Officer

Yes, Neil, this is Jeff again. Again as I mentioned earlier, that's something we're absolutely going to debate and talk about with the Board as we move into the third and fourth quarter. Again, I want to reiterate, we want to make sure we get to our debt target that I mentioned earlier that 1 times turn, which I fully expect given where prices are, more accomplish that here in the third quarter. But as we move into our discussions into the fall with our Board around the budget for 2022 and the potential outcome around share repurchases, the fixed dividend and incremental variable dividends on top of the 50%, I think those are all things we'll talk about here over the next call it three months and would expect to give you all more color as we move through the year.

Neil Mehta -- Goldman Sachs -- Analyst

Okay. Thanks.

Operator

Your next question is from Matthew Portillo with TPH.

Matthew Portillo -- Tudor, Pickering, Holt & Co -- Analyst

Good morning all and thanks for taking my question. This one might be for Clay. I was just wondering if you can talk about some of the strong results you're seeing in the Bone Spring around Stateline. How that may impact your future inventory of development plan as your looking forward?

Clay Gaspar -- Executive Vice President and Chief Operating Officer

Yes, thanks for the question, Matt. It's really exciting. So we -- the original acquisition was based on really the Wolfcamp A. We knew there was additional upside, but really pinning the acquisition economics in the forward plan was really on kind of a greater or Upper Wolfcamp landing zones and that's been amazing. The homerun is really where you get these additional landing zones essentially for free, right. And that's, that's what was so intriguing about the original entry into the Delaware. And as I mentioned in the prepared remarks, just the continued dividends better pay from it. So we knew there was opportunity in the second Bone. We had drilled some early wells, but as we've refined the petrophysics and really dialed into the proper landing zones, we've been very encouraged at least three maybe four landing zones in the Bone Spring and the real questions have been -- we've been working on is proper spacing come laterally, but also in a vertical sense.

How much of this is in hydraulic communication? And we're starting to kind of nail that down and now you're starting to see us move into the development mode, which is just significant upside on that -- the incredibly rich infrastructure right there. And I talk about infrastructure, it's everything from owning the electrical infrastructure, water disposal system, our partnership with Howard Energy to relever all of those benefits. And then also recall that we purchased 15,000 surface acres over this whole area. And so again as we continue to rediscover, refind new opportunities literally exploration under our own feet, this is some of the most accretive value creation for the organization without question.

Matthew Portillo -- Tudor, Pickering, Holt & Co -- Analyst

That's great and then maybe just another follow-up on the operational side. The WPX team is working to widen spacing designs in parts of the Delaware before the merger with Devon. I guess with both of the teams now combined, could you talk about what you've learned so far from the completion and spacing optimization perspective and how that might influence your results moving forward?

Clay Gaspar -- Executive Vice President and Chief Operating Officer

Yes, this is one of the, kind of the hidden lens of what we talk about synergies. We can put a number on so many things and we've described this $600 million, which by the way, I feel very confident in achieving by year-end. But I think these are the kind of things that are synergistic in nature. You've got two really, really smart teams that have been trying to solve this problem independently. Now I have the opportunity to really learn together, share data, share resources, share lessons learned, wins, losses along the way. And it really kind of super charges that. So I don't know that we moved dramatically in any one area around spacing, but I think what's really interesting is to watch the continued improvement on the cost side of the equation.

We're drilling wells in 12 days, 2 mile laterals and some pretty challenging areas and that's phenomenal. That adds incredible efficiency on the front end of the economics. The capital and the design associated with the completion is really where these wells will start to separate and that's well placement, stimulation design and all of those attributes that go in. We're testing, we're turning a lot of knobs in that space. Too early to call on kind of what is the go-forward consistent plan across the whole Delaware Basin.

My intuition will tell me that it's multiple go-forward plans in different areas. We'll continue to learn. We're looking a lot of new technologies and at the same time continuing to get better from an ESG front. I can tell you, that's another one of the hidden wins from synergies. We're making great strides on that and I think it's a very much beneficial symbiotic relationship there as well.

Matthew Portillo -- Tudor, Pickering, Holt & Co -- Analyst

Thank you.

Operator

Your next question is from Neal Dingmann with Truist Securities.

Neal Dingmann -- Truist Securities -- Analyst

Good morning guys. Thanks for getting me on. Two questions, and kind of both been asked, I want to ask in different ways. Maybe Rick first for you. Just, first question is maybe on free cash flow allocation. I guess my question around that is, obviously you're doing a great job of the variable dividend, been the first out of the gate, but I'm just wondering, one, do you think you're being appropriate rewarded for that variable and just the total divs in general. And to me kind of combined with that what appears to be your stock trading at a discount to NAV, maybe why not do some more buybacks near term given that discount?

Rick Muncrief -- President and Chief Executive Officer

Yeah, Neal, that's a question that we all debate here internally. I'm not convinced that we've seen that yet. I think there's a question around the variable dividend about consistency and you get quarter-over-quarter of some really nice dividends. I'm encouraged by the actions of our -- some of our other industry peers and I think what you're going to find is now Devon is not just being treated as one-off, it's truly a movement within our sector of getting more cash back to shareholders. I think that's a good thing. So when you look at it from that perspective, I think we will start seeing better equity performance. But if not, certainly the discussion we had about share repurchases really comes -- it comes to light and it's great to have optionality. So you heard Jeff a while ago, talk about the ability to ratchet up the variable dividend with the stronger cash flows. We also would -- from an opportunistic standpoint, have the ability to certainly repurchase the equity.

The third thing I think that, when we think about capital allocation just a little more longer term, but we don't have any near-term debt maturities. We do have a couple of hundred million due I think here in 2023, but we have an incremental $800 million of callable debt in the next 24 months. And so we have options and Neal that's what I love about a portfolio or strategy, the optionality, strong balance sheet all that is going to I think really make for an exciting story over the next few years and that's something I'm very, very pleased with how it's coming together with the merger. So I think suffice to say, we don't -- if we don't see the equity performing to the level that we feel it should be, it's going to be a really good discussion with our Board, and I think they'll be very supportive of us pursuing opportunistic share repurchases.

Neal Dingmann -- Truist Securities -- Analyst

You have really been the pioneer of this variable dividend. Great to see the options. And then secondly just on my question on the capital allocation. Clay, obviously the Delaware sort of speak for themself what you're dealing with that Stateline development Cotton Draw etc. It just seems like every quarter the efficeincies are getting better. So I'm just wondering when you think about -- and you have mentioned your excitement in Powder River and obviously you've got that Eagle Ford etc, could you talk about how you think about the capital allocation is? Are we sort of that as you said the workhorse will probably continue to be the Delaware, but how do you think about allocating the capital because you've got obviously a lot of other exciting areas?

Clay Gaspar -- Executive Vice President and Chief Operating Officer

Yes, thanks for the question Neal. So set Delaware aside, because it's just -- it's kind of first in line, takes a lion's share is the growth engine... You know the story there. I think thinking about the other assets. The Williston Basin, I have more familiarity with more history with and you've seen the phenomenal returns year after year after year there. We've been 100% transparent that we're just short on inventory, and so it just doesn't command a whole lot of capital today. As we think about the other assets I mentioned the JV we have in the Mid-Continent area. It's a wonderful investment, but it is of a certain scale, right. It's in time, if it's very successful, we could scale up in time. If we want to do something different, we could certainly scale down. There is even a scenario where if in the best success case, it really can beat that well, we continue to drive the invest in the asset on a heads up basis.

As I move to places like South Texas, we have a partnership there with BP. And so there is a dance we have to do together to measure our expectations on capital investment along with theirs. I can tell you it's a really phenomenal asset. We're really pleased with the returns and we're really pleased with our partnership there we have with BP. I think the teams have both worked very well together to make sure that they are working well in advance. And so there is no surprises on either end. And so that is something that's kind of almost pre-baked as we start thinking about some of the activity.

The Powder River Basin, I think as I've mentioned in the prepared remarks, I'm very encouraged by the continued industry activity, some really tier one players in the area that are excited. There is a lots of opportunity. As we know when you really do a thorough post appraisal, it's just been challenged. And so I think taking a real commercial opportunistic look at how we create value there is a multi-step process. We're just, like I said, we kind of refresh part of the team and I think that that helps kind of one bring some new questions and challenges to the asset, but it's also a new way to kind of bring some more life in and think about how do we energize that asset to create value and ultimately keep compete for capital in the portfolio.

Neal Dingmann -- Truist Securities -- Analyst

Thanks, guys, thanks for the time.

Rick Muncrief -- President and Chief Executive Officer

Thanks Neal.

Operator

Your next question is from David Heikkinen with Pickering Energy Partners.

David Heikkinen -- Pickering Energy Partners -- Analyst

Good morning guys and thanks for...

Rick Muncrief -- President and Chief Executive Officer

Hey Dave.

David Heikkinen -- Pickering Energy Partners -- Analyst

Hope you're doing well. Most of the questions were asked. So I was trying to think through the combination of the new Sustainability Report for 2021 and your methane emissions targets, how do you think through where the merged company will be and then what that's going to be a little bit of an early look as you start thinking about the outlook for the company?

Rick Muncrief -- President and Chief Executive Officer

Thanks, I appreciate the question. I think it was very important to us not to just set a very long range target and say, trust us, we'll get there. So we set intermediate kind of ranges, goals as well. And so we have intermediate steps around 2025 and 2030 that are peppered throughout the document. And I can tell you we're well on our way. I mean, just to point to some of the areas, I think about one of the most important is around greenhouse gas emissions, and I think of the Southern Delaware which is the legacy WPX asset. We were about 5% a couple of years ago. We average about 2.5% last year. State-of-the-art today last probably quarter we are somewhere between 1% and 1.5%. And so that's, that's very encouraging. There is a lot of meat on that bone, because when you compare to the legacy Devon asset just across the border, they've been running about 0.5% and so we see line of sight to where that Southern Delaware needs to go. We just need to do a little bit more work on some of the infrastructure, some of the cultural mindset about how we flow back what we're going to do, flowback and building infrastructure and how we manage the wells themselves.

I think about the other areas, both South Texas and Mid-Continent are phenomenal in that regard. Powder is a little bit more challenged. The big challenge is the Williston. And for all the Williston players you hear the same story. It is a real challenging infrastructure asset that is continued to be the case. I can tell you we are pushing really, really hard on that. We've dropped the emissions by about a third over the last year, but it's still nothing to brag about, OK, it's still about a 10% number which we need to continually improve on. We are investing in that. We're leveraging all of the relationships we have to continue to drive that down and we will achieve our '25 and '30 targets as we've said out, but there's a lot of work to do between now and then.

David Heikkinen -- Pickering Energy Partners -- Analyst

Okay, it's helpful. Thanks for the answer.

Rick Muncrief -- President and Chief Executive Officer

Sure.

Operator

Your next question is from Paul Cheng with Scotia Bank.

Paul Cheng -- Scotia Bank -- Analyst

Thank you. Good morning. Two questions please. I think first is maybe for Jeff. At $70 plus oil. I think in the past that you guys were talking about you won't be a cash tax payer due to this -- the latter half of the decade. Just want to see that how that progression is may or may not have changed. And also can you talk about the earn-out accounting look like today's pricing that you should get earn-out money on that, so that in terms of the cash flow on the P&L account and maybe that you can help us understand a little bit better on that. The second question, and I think it's for Clay. Can you talk about the inflation was that -- I mean how much inflation that you're seeing, particularly in the Permian at all. And then finally, just wanted to hear your comment on the hedging. I appreciate that you guys maybe there is shipping band, the activity level and quite frankly with the Shale 3.0 business model [Indecipherable] on that. I'm not sure that why you will need hedging at all? I think your shareholder will actually be better of without it. Given the industry poor record in terms of hedging in the long run that seems like [Indecipherable] having single company? Thank you.

Jeff Ritenour -- Executive Vice President and Chief Financial Officer

Hey, Paul, I appreciate the thoughts on the question that was a mouthful. I think we've got the second half of the question, if you wouldn't mind, could you just refresh us on that first question just so we get to what you're asking?

Paul Cheng -- Scotia Bank -- Analyst

For $70 plus oil prices, Jeff. That -- when -- that in terms of the cash tax-paying that projection had been changed from what you have said in the past.

Jeff Ritenour -- Executive Vice President and Chief Financial Officer

Yes, Paul, OK, I got you. Yes, really short answer is no material change from what we talked about on the previous call. If you recall what we -- current projection, we think we'll enter into next year was probably over $3 billion of Federal NOLs. So that puts us in a pretty good position to shield ourselves from taxes in the near term. Obviously price deck is as you highlight in your question can have a material impact of that. Our current expectation, though, given the NOL position that we have in our current projections, even at these higher prices, we really don't expect to be a material cash taxpayer for a number of years. So again that's going to be consistent with what we talked about in the past and no material changes there. Obviously, one of the things that we're evaluating and thinking about in the broader macro specific to the tax -- our specific tax position and then just more broadly is any changes that the administration may make as it relates to IDC or any of the other specifics around how we would calculate our tax position. Again no new news on that front. We've not gotten any better clarity as to the direction of the administration, where they may head on that front. But we've certainly been run the sensitivities and evaluating the potential outcomes. Again given our tax attributes today, we really feel like we're in a good spot and don't expect taxes to be detrimental impact to our free cash flow story for a number of years.

Clay Gaspar -- Executive Vice President and Chief Operating Officer

Yeah, Paul, I'll pick of this play on the inflation question. Was there something else first?

Paul Cheng -- Scotia Bank -- Analyst

Yes. And then, how about the earn-out campaign given your commodity prices that you should be able to get some money from the earn-out?

Jeff Ritenour -- Executive Vice President and Chief Financial Officer

Paul, I think you're asking about the contingent payment specific to our Barnett transactions.

Paul Cheng -- Scotia Bank -- Analyst

Correct.

Jeff Ritenour -- Executive Vice President and Chief Financial Officer

Yes, absolutely. So we -- the one item you probably saw in the quarter as we adjusted our expectation there given the higher prices and so as we look at, again this is, I'm going to use the forward strip as the baseline here. But as we look at 2022, or excuse me 2021 in the results and the prices that we've seen to-date, we would expect to receive a contingent payment on our Barnett transaction. It could be in the ballpark of $40 million. So that would be incremental cash that will be coming in the door to us as a result of that transaction.

Paul Cheng -- Scotia Bank -- Analyst

And does it have any P&L impact?

Jeff Ritenour -- Executive Vice President and Chief Financial Officer

P&L impact. Yes, no, we've adjusted that contingent payment in our results for the second quarter. So you shouldn't see a big impact going forward.

Paul Cheng -- Scotia Bank -- Analyst

Okay, thank you.

Clay Gaspar -- Executive Vice President and Chief Operating Officer

And Paul, this is Clay. I'll pick up on your original question to around inflation. Look my belief is inflation is real. I appreciate Fed Chairman saying there is some transitory things happening in the macro sense, but I think you go anywhere, talk to any business owner and there is struggles to get employees and things working, even trying to buy relatively routine thing. So I think there is one level inflation kind of in a macro sense and then specific to our industry, higher commodity price obviously is driving some increase in activity.

The question I have and I think is still yet to prove out is, the historical correlation between commodity price and rig activity is disconnected and that's a good thing, from the sense of our industry discipline. And so I think, what we need to do is not necessarily focused on the commodity price, but it's more of the resulting activity. Certainly some of the private folks have picked up more rigs differentially relative to the larger publics. I think as the larger publics continue to hold the line on disciplined cash flow returning sustainability in that regard, I think we will continue to see moderate growth on activity.

So what that means to us is, summing those two things up, certainly, we will see some inflation. We're seeing it now. We have certainly baked that into our '21 expectations guidance. I have a lot of confidence and again, being able to meet our guidance for the balance of the year. As we start to look forward and really trying to hone in on '22, I think there's still some questions out there. Clearly, we expect to see some inflation. I'm not ready to prepare and put a number on to it today. We're just starting our really deep conversations in a long-term sense with the Board as we work through capital investment levels, some of the things we've talked about on this call and certainly an incredibly important part of that math is inflation. So we see it coming. We're prepared for it. We're working to mitigate as best we can. We believe our relationships and the partnership that we can offer from a very consistent and robust program with a company that does what it says it's going to do, I think offers a lot of value to our service company partners and end of the day, we will see some higher cost, but not prepared really point to a number just yet.

Paul Cheng -- Scotia Bank -- Analyst

All right, thank you.

Operator

Your next question is from Scott Hanold with RBC Capital Market.

Scott Hanold -- RBC Capital Market -- Analyst

Thanks guys. My question is when you step back and think about Devon's strategy and how you return cash to shareholders. Do you all have a sense on how you view the best way to give value back to investors is meaning, do you think it's a higher -- the highest dividend yield, is that the real way you think long-term you're going to create value or is it finding ways to view that free cash flow to over time generate incremental more free cash flow. Is that -- do you all have a certain thesis or strategy at this point?

Rick Muncrief -- President and Chief Executive Officer

Yes, Scott, one thing -- it's. Rick. One thing that we constantly try to keep a pulse on and that is in investor preferences and that's not always easy. Because all you have sometimes and so from our perspective, we think a balanced approach is a pretty good way to look at it and you may be a little crossed one quarter or two quarters, but over time, we think that's the best way to do it and that's why you heard us talk about optionality. I think more near-term, I think higher dividends show me the money now has been, I think the lion's share of the feedback that we've been hearing from shareholders. And I think that as we look at our shareholder group, we think that it's continued to strengthen as we are getting really some nice shareholders across the line and really pleased with that.

Now, I think you'll also hear over time maybe more comments and more perspectives on a little longer term approach. I think it's -- that's an outcome, maybe some more stability in commodity prices. And when I think commodity price, I'm thinking about not only crude oil, which drives most of the revenues, but I can tell you NGLs are. We have some really, really nice exposure to the NGLs from basically all three of our basins. Nice place to be. And so that -- if you get into a situation where even with your best efforts of getting cash back to shareholders, significant amount of cash to shareholders, if you still think you're being not rewarded properly with your equity performance, it really sets you up for some opportunistic share repurchases. And that's something that even though that we're 20% growth next year on the cash flow per share, you have to have both the numerator and the denominator, not a bad way to go. And that's how you can deliver some growth, because I think the broader market continues to reward growth. Our sector, we just can't -- we're not going to get rewarded for growth right now as we've all talked about for last year. So how can you do things opportunistically both on the numerator and denominator.

And then the third option is just, is on the balance sheet. Just continue to have a forecast type balance sheet, which we have wonderful balance sheet is getting stronger every quarter. But at the end of the day, we also have some callable debt, they will have to think about over the next couple of years where we pull the trigger on that or just treat it as a net debt tieback exercise. So really good spot to be in, and that's really how we view it. It's really in summary we just try to do the best job we can day-in, day-out, in trying to keep a good pulse on what investors are looking for. And I do think, and this is day in time as we said in our opening comments when you have a near-zero percent interest world that we're in right now these yields are really, really compelling and we're all shareholders and we love those quarterly dividend checks I can tell you. Those are really nice. So that's really how we're looking at it. Hopefully that's some color that can help you.

Scott Hanold -- RBC Capital Market -- Analyst

Yes, no, it's very appreciated. And just a quick last question here. And Clay, I think you kind of alluded to this already, but you've obviously with your greater efficiencies and you guys continue to outperform I guess even your expectation on your quarterly production guidance and look on pace to be there for the full year. It doesn't sound at least like this year you're going to probably taper activity much. Is that sort of the concept that we should think about as we think about 2022, if you guys are still running a little bit more efficient, you're going to kind of maintain that activity and maybe grow into that 5% I guess kind of cap rate that you have out there?

Clay Gaspar -- Executive Vice President and Chief Operating Officer

Yes, I think it's a great question and I appreciate the clarification, because obviously as we run a constant rig program and those rigs become more efficient, you just draw more capital into the calendar year. That's a normal thing we've seen before. We love that kind of win. Those are always beneficial, ultimately investments that we're making, right. The challenge can be your capital constrained during the calendar year, which is obviously how we guide. I feel very comfortable on being able to deliver our capital during the year even with the efficiencies. How that manifests into '22 yet to be determined, but here is kind of what it could look like in my mind. If we find that 12 rigs in the Delaware can do, we are doing with 13 and that achieves our goal. We can run 12. What I don't want to do is drop to 12 or 11 or 10 and then try to scale back up in a couple of months, just to try and kind of gain the capital for the calendar year, until its value destructive to the asset teams and its value destructive to our service companies. And so I think that consistency approach is very, very important. And what you'll see us do is kind of run through. Now, when we make a move to more or less rigs, hopefully we're very steady in that regard as well and predictable and deliver on what we say we're going to do.

Scott Hanold -- RBC Capital Market -- Analyst

Appreciate it. Thank you.

Rick Muncrief -- President and Chief Executive Officer

All right. It looks like we're at the end of our time slot today. We appreciate everyone's interest in Devon. And if you have any further questions, please don't hesitate to reach out to the Investor Relations team at anytime. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Scott Coody -- Vice President, Investor Relations

Rick Muncrief -- President and Chief Executive Officer

Clay Gaspar -- Executive Vice President and Chief Operating Officer

Jeff Ritenour -- Executive Vice President and Chief Financial Officer

John Abbott -- Bank of America -- Analyst

Brian Downey -- Citigroup -- Analyst

Nitin Kumar -- Wells Fargo -- Analyst

Neil Mehta -- Goldman Sachs -- Analyst

Matthew Portillo -- Tudor, Pickering, Holt & Co -- Analyst

Neal Dingmann -- Truist Securities -- Analyst

David Heikkinen -- Pickering Energy Partners -- Analyst

Paul Cheng -- Scotia Bank -- Analyst

Scott Hanold -- RBC Capital Market -- Analyst

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