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Devon Energy (NYSE:DVN)
Q3 2021 Earnings Call
Nov 03, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Welcome to the Devon Energy's third quarter earnings conference call. At this time, all participants are in a listen-only mode. This call is being recorded. I would now like to turn the call over to Mr.

Scott Coody, vice president of investor relations. Sir, you may begin.

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 members of our senior management team.

Comments today will include plans, forecasts, and estimates that are forward-looking statements under U.S. 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. It's great to be here this morning. We appreciate everyone taking the time to join us on the call today. Devon's third quarter results were outstanding.

Once again showcasing the power of our Delaware focused asset portfolio and then the benefits of our financially driven business model. Our team's unwavering focus on operations excellence has established impressive momentum that has allowed us to capture efficiencies, accelerate free cash flow, reduce leverage, and return of market-leading amount of cash to shareholders. Simply put, we are delivering on exactly what our shareholder-friendly business model was really designed for, and that is to lead the energy industry in capital discipline and cash returns. Now moving to Slide 4.

While our strategy is a clear differentiator for Devon, the success of this approach is underpinned by our high-quality asset portfolio that is headlined by our world-class acreage position in the Delaware Basin. So with this advantaged portfolio, we possess a multi-decade resource opportunity in the best position plays on the U.S. cost curve. And with this sustainable resource base, we are positioned to win multiple ways with our balanced commodity exposure.

While our production is leveraged to oil, nearly half our volumes come from natural gas and NGLs, providing us with meaningful revenue exposure to these valuable products. This balance and diversification are critically important to Devon's long-term success. As you can see on Slide 5, the strength of our operations and the financial benefits of our strategy were on full display with our third quarter results. This is evidenced by several noteworthy accomplishments, so including: we completed another batch of excellent wells in Delaware Basin that drove volumes 5% above our guidance.

We maintained our capital allocation in a very disciplined way by limiting our reinvestment rates to only 30% of our cash flow. We're continuing to then the capture synergies and drive per unit cost lower. We are also achieving a more than eightfold increase in our free cash flow. We're increasing our fixed and variable dividend payout by 71%.

We're also improving our financial strength by reducing net debt 16% in the quarter. Overall, it was another tremendous quarter for Devon, and I especially want to congratulate our employees and our investors for these special results. Now moving to Slide 6. While 2021 is wrapping up to be a great year for Devon, the investment thesis only gets stronger and as I look ahead to next year.

Although we're now still working to finalize the details of our 2022 plan, I want to emphasize that our strategic framework remains unchanged, and we will continue to prioritize free cash flow generation over the pursuit of volume growth. As we have stated many times in the past, we have no intention of adding incremental barrels into the market until demand side fundamentals sustainably recover and it becomes evident that OPEC+ spare oil capacity that's effectively absorbed by the world markets. With this disciplined approach and to sustain our production profile in 2022, we are directionally planning on an upstream capital program in the range of $1.9 billion to $2.2 billion. Importantly, with the operating efficiency gains and improved economies of scale, we can fund this program at a WTI breakeven price of around $30.

This low breakeven funding level is a testament to the great work the team has done over the past few years to streamline our cost structure and to really optimize capital efficiency. Being positioned as a low-cost producer provides us with a wide margin of safety to continue to execute on all facets of our cash return model. With our 2022 outlook, Devon will have one of the most advantaged cash flow growth outlooks in the industry. At today's prices, with the full benefit of the merger synergies and an improved hedge book, we're positioned for cash flow growth of more than 40% compared to 2021.

And as you can see on the graph, this strong outlook translates into a free cash flow yield of 18% at an $80 WTI price. The key takeaway here is that 2022 is shaping up to be an excellent year for Devon shareholders. Now jumping ahead to Slide 8, the top priority of our free cash flow is then fund our fixed plus variable dividend. This unique dividend policy is specifically designed for our commodity-driven business and provides us the flexibility to return more cash to shareholders than virtually any other opportunity in the markets today.

Now to demonstrate this point, so we've included a simple comparison of our estimated dividend yield in 2022 based on our preliminary guidance. As you can see, Devon's implied dividend is not only more than double that of the energy sector, but this yield is vastly superior to us in every sector in the S&P 500 index. In fact, at today's pricing, Devon's yield is more than seven times higher than the average company that is represented in the S&P 500 Index. Now that's truly something to think about in the yield-starved world we currently live in.

And moving on to Slide 9. With our improving free cash flow outlook and strong financial position, I'm excited to announce the next step in our cash return strategy with the authorization of a $1 billion share repurchase program. This program is an equivalent to approximately 4% of Devon's current market capitalization and is authorized through year-end 2022. Jeff will cover this topic in greater detail later in the call, but this opportunistic buyback is a great complement to our dividend strategy and provides us with another capital allocation tool to enhance per share results for the shareholders.

Now skipping ahead to Slide 11 and to close out my prepared remarks, I want to summarize Devon's unique investment proposition through three simple charts. Beginning on the far left chart of our business is positioned to generate cash flow growth of more than 20 -- 40% in 2022, which is vastly superior to most other opportunities in the market. As you can see in the middle chart, this strong growth translates into an 18% free cash flow yield that will be deployed to dividends, buybacks, and the continued improvement of our balance sheet. And lastly, on the far right chart, and even with all of these outstanding financial attributes, we still trade at a very attractive valuation, especially compared to the broader market indices.

We believe this to be another catalyst for our share price appreciation as more and more of the investors discover Devon's unique investment proposition. And with that, I'll turn the call over to Clay to cover some of the great operational results we delivered in the third quarter. Clay?

Clay Gaspar -- Chief Operating Officer

Thank you, Rick. Hey, good morning, everybody. In summary, Devon's third quarter impressive results were the result of tremendous execution across nearly every aspect of our business. We had wins in environmental and safety performance.

operational improvements, continued cultural alignment, strong well productivity, cost control, significant margin expansion and ultimately, excellent returns on the invested capital. This recurring trend in our operational excellence while managing significant organizational change and macro stress has now been established over multiple quarters and is a testament to the Devon employees and strong leadership throughout the organization. As I look forward to '22 and beyond, I believe we're positioned to continue delivering but also take our performance to an even higher level of cohesion and productivity. Providing the energy to fuel today's modern world is critically important work.

I'm very proud of what we do and how we do it. As I look forward to Devon's near and also long-term goals, I'm confident in our ability to deliver on society's ever-increasing expectations. Let's turn to Slide 13, and we can dig into the Delaware Basin. Devon's operational performance in the quarter is once again driven by our world-class Delaware Basin assets, where roughly 80% of our capital was deployed.

With this capital investment, we continue to maintain steady activity levels by running 13 operated rigs and four frac crews, bringing on 52 wells during the quarter. As you can see in the bottom left of the slide, this is just focused development program translated into another quarter of robust volume growth, and our continued cost performance allowed us to capture the full impact of the higher commodity prices. Turning your attention to the map on the right side, our well productivity across the basin continue to be outstanding in the quarter with the results headlined by our Boundary Raider project. Some may recall that this is not the first time we've delivered on impressive results from this well pad.

Back in 2018, our original Boundary Raider project that's developed a good package of Bone Spring wells that set a record for the highest rate wells ever brought online in the Delaware Basin. Fast forward to today, this addition of the Boundary Raider went further downhole to develop an overpressured section in the Upper Wolfcamp. This project also delivered exceptionally high rates with our best well delivering an initial 30-day production rates of 7,300 BOE per day, of which more than that -- more than 60% of that was oil. I call that pretty good for a secondary target.

Moving a bit east into Lea County, another result for this quarter was the Cobra project, where the team executed on a 3 mile Wolfcamp development. This pad outperformed our predrill expectations by more than 10% with the top well achieving 30-day rates as high as 6,300 BOE per day. In addition to the strong flow rates, this activity helped us prove the economics of the Wolfcamp inventory in this area to further deepening the resource-rich opportunity we hold in the Delaware. Turning to Slide 14.

With the strong operating results we delivered this quarter, high-margin oil production in the Delaware Basin continue to expand and rapidly advance, growing 39% year over year. Importantly, the returns on invested capital to deliver this growth were some of the highest I have seen in my career, bolstered by rising strip prices and our capital efficiency improvements we have delivered this year. These efficiencies are evidenced on the right-hand chart, where our average D&C costs improved to $554 per lateral foot in the third quarter, a decrease of 41% from just a few years ago. While we have likely found the bottom of this cycle earlier this year, the team continues to be able to make operational breakthroughs that have thus far fought back most of the inflationary pressure.

We continue to win from a fresh perspective, blending teams and also still relatively -- we're still working to know each other pretty early on. These accomplishments are clearly demonstrated and the great work our team has done to drive improvements across the entire planning and execution of our resource. To maintain this high level of performance into 2022, and we are focused on staying out ahead of the inflationary pressures that are impacting not just our industry, but all aspects of the broader society. While our consistency and scale in the Delaware are a huge advantage, the supply chain team is working hard to anticipate issues, mitigate bottlenecks, and work with the asset teams to adjust plans to optimize our cost structure and future capital activity.

Turning to Slide 15. Another asset I'd like to put in the spotlight today is our position in the Anadarko Basin, where we have a concentrated 300,000 net acre position in the liquids-rich window of the play. As you may know, Rick and I both have a historical tie to this basin, and we're thrilled to get to see the great work that our teams are doing to unlock this value for investors. A key objective for us this year in the Anadarko Basin is to reestablish operational continuity by leveraging the drilling carry from our joint venture agreement with Dow.

By way of background, in late 2019, we formed a partnership with Dow in a promoted deal, where Dow earns half of our interest on 133 undrilled locations in exchange for $100 million drilling carry. With the benefits of this drilling carry, we're drilling around 30 wells this year, and our initial wells from this activity were brought on during the quarter. The four-well Miller/Miller project is an up-spaced Woodford development in Canadian counter -- County and is off to a great start with both our D&C costs and well productivity outperforming pre-drill expectations. Initial 30-day rates averaged 2,700 BOE per day, and completed well costs came in under budget at around $8 million per well.

While I'm proud of how well the team hit the ground running now as we get into our processes lined out and efficiencies dialed in, I foresee material improvements in well costs ahead. The leverage returns from this carried activity will complete -- will compete effectively for capital with any asset in our portfolio. In fact, the strength of natural gas and NGL pricing, the performance we're also seeing that in the Anadarko Basin will likely command relatively more capital than it did in '21. Moving to Slide 16.

While the Delaware Basin is clearly the growth engine of our company and we're excited about the upside for the Anadarko, we also have several high-quality assets in the oil fairway of the U.S. that generates substantial free cash flow. While these assets don't typically grab the headlines, their strong performance is central to this continued success of our strategy. These teams are doing great work to improve our environmental footprint, drive the capital program, optimize base production, and hopefully, keeping our cost structure low.

As an example, Williston will generate over $700 million of 2021 free cash flow. Collectively, these assets are on pace to generate nearly $1.5 billion of free cash flow this year. Lastly, on Slide 17, with our diversified portfolio concentrated in the very best U.S. resource plays, we have a deep inventory of opportunities that underpin the long-term sustainability of our business model.

So, as you may have heard me talk about in prior quarters, we have a brutal capital allocation process in regards to the competitiveness of how we seek the best investment mix for the company. This is the first step of this process is to make sure that all the teams are working from the same assumptions and inputs. Since the close of our merger earlier this year, we have undertaken a very disciplined and rigorous approach to characterize risk, force rank the opportunity set across our portfolio. This inventory disclosure is the result of our detailed subsurface work and evaluation across our portfolio that we converted into a single consolidated platform to ensure consistency.

Turning your attention to the middle bar on the chart. At the current pace of activity, we possess more than a decade of low-risk and high-return inventory of what we believe to be in a mid-cycle price deck. As you would expect, about 70% of our inventory resides in the Delaware Basin, providing the depth of inventory to sustain our strong capital efficiency for many years to come. Let me be clear.

And this exercise, we are focused on compiling a very important slice of our total inventory. This summary is not meant to convey the full extent of the possible with these incredible resources. These are really operated, essentially all long lateral up-spaced wells that deliver competitive returns in a $55 oil environment. Moving to the bar on the far right of the chart, we also expect inventory depth to continue to expand as we capture additional efficiencies, optimize spacing, and further delineate the rich geologic column across our very acreage footprint.

Expect -- we expect a significant portion of the upside opportunities to convert into our derisked inventory over time. So the examples of this upside include the massive resource potential in the lower Wolfcamp intervals, continued appraisal success in the Powder River Basin and the significant liquids-rich opportunity we possess in the Anadarko Basin. The bottom line here is that we have that in abundance of high economic opportunity to not only sustain but grow our cash flow per share for many years to come. With that, I'll turn the call over to Jeff for the financial review.

Jeff Ritenour -- Chief Financial Officer

Thanks, Clay. I'd like to spend my time today discussing the substantial progress we've made advancing our financial strategy and highlight the next steps we plan to take to increase cash returns to shareholders. A good place to start is with the review of Devon's financial performance in the third quarter, where Devon's earnings and our cash flow per share growth rapidly expanded and comfortably exceeded consensus estimates. Operating cash flow for the third quarter totaled $1.6 billion, an impressive increase of 46% compared to last quarter.

This level of cash flow generation comfortably funded our capital spending requirements and generated $1.1 billion of free cash flow in the quarter. This result represents the highest amount of free cash flow generation Devon has ever delivered in a single quarter and is a powerful example of the financial results in our cash return and that the business model can deliver. Turning your attention to Slide 7. With this significant stream of free cash flow, a differentiating component of our financial strategy is our ability and willingness to accelerate the return of cash to shareholders through our fixed plus variable dividend framework.

This dividend strategy has been uniquely designed to provide us the flexibility to optimize the return of cash to shareholders across a variety of market conditions through the cycle. Under our framework, we pay a fixed dividend every quarter and evaluate a variable distribution of up to 50% of the remaining free cash flow. So, with the strong financial results we delivered this quarter, the board approved a 71% increase in our dividend payout versus last quarter to $0.84 per share. This is the fourth quarter in a row we have increased the dividend and is by far the highest quarterly dividend payout in Devon's 50-year history.

As you can see on the chart to the left, at current market prices, we expect our dividend growth story to only strengthen in 2022. In fact, at today's pricing, we are on pace to nearly double our dividend next year. Moving to Slide 10. In addition to higher dividends, we've also returned value to shareholders through our efforts to reduce debt and improve our balance sheet.

So far this year, we've made significant progress toward this initiative by retiring over $1.2 billion of outstanding notes. In conjunction with this absolute debt reduction, we've also added to our liquidity, building a $2.3 billion cash balance at quarter end. With this substantial cash build and reduction in debt, we've reached this debt-to-EBITDA leverage target of one turn or less. Even with this advantaged balance sheet, we're not done making improvements.

We have identified additional opportunities to improve our financial strength by retiring approximately $1.0 billion of premium -- excuse me, low-premium debt in 2022 and 2023. Importantly, Devon has the flexibility to then execute on this debt reduction with cash already accumulated on the balance sheet. And to route -- round out my prepared remarks this morning, I'd like to provide some thoughts on the $1 billion share repurchase program we announced last night. While the top priority for free cash flow remains the funding of our market-leading dividend yield, we also believe that this buyback authorization provides us another excellent capital allocation tool to enhance per share results for shareholders.

Given the cyclical nature of our business, we'll be very disciplined with this authorization, only transacting when our equity trades at a discounted valuation to historical multiples and in multiple levels of our highest quality peers. We believe the double-digit free cash flow yield our equity delivers, as outlined on Slide 6, represents a unique buying opportunity. The reduction in outstanding shares further improves our impressive cash flow per share growth and adds to the variable dividend per share for our shareholders. With these disciplined criteria, guiding our decision making, we'll look to opportunistically repurchase our equity in the open market once our corporate blackout expires later this week.

So in summary, the financial strategy is working well. We have excellent liquidity and our business is generating substantial free cash flow. We're positioned to significantly grow our dividend payout to over the next year. The go-forward business will have an ultra low leverage ratio of a turn or less, and we'll look to boost per share results is really opportunistically repurchasing our shares.

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

Rick Muncrief -- President and Chief Executive Officer

Thank you, Jeff. Great job. In closing today, I'd like to highlight a few things. Number one, Devon is meeting the demands of investors with our capital discipline, earnings and cash flow growth, market-leading dividend payout, debt reduction, and now a share buyback program.

Number two, Devon is also meeting the demands of our market with strong oil production results, great exposure to natural gas and NGLs, along with our consistent execution. And number three, lastly, Devon is also meeting the demands of society by providing a reliable energy before this pandemic, during the pandemic, and as we emerge from the pandemic. And so our people throughout the five states where we operate continue to show up for work and work safely. We didn't overreact with our capital program during the pandemic like many others did.

We actually strengthened the company with a merger. And finally, we're laser-focused on then achieving the stated short-term, midterm, and long-term ESG targets. We're proud of the work we've done and look forward to continuing meeting the needs of investors, the market, and society for the foreseeable future. Devon is a premier energy company, and we're excited about the value we'll be able to consistently provide to our important stakeholders.

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'll now open the call to Q&A. [Operator instructions] With that, operator, we'll take our first question.

Questions & Answers:


Operator

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

Arun Jayaram -- JPMorgan Chase and Company -- Analyst

Yeah. Good morning, team. Rick, I wanted to maybe start off talking about the inventory depths slide that you put out. 11-plus years of a low-risk development opportunity, 70% in the Delaware Basin.

We have seen a couple of large Permian Basin trades with Conoco and Pioneer earlier this year, so I want to get your thoughts on how you're thinking about portfolio renewal just given that inventory depth. And perhaps Clay could also comment on the ability of -- to derisk some of the wells in that 2,500 well bucket, including that deeper Wolfcamp zone.

Rick Muncrief -- President and Chief Executive Officer

Yeah, it's a great question, Arun, and I'll have Clay weigh in and provide some more details. So the way we're looking at it is, number one, as Clay has talked about, we did a very comprehensive deep dive. We -- and once again these numbers are strictly operated, so we have not operated projects out there that are not in this camp. We wanted to make it really clear that these are operated wells, where we're going to control the drilling completion activities.

We also contemplated many of the sections that have been set up as 1 mile laterals are now 2 mile laterals with some of the acreage consolidations that we've seen. And in some cases, where you've got the federal units, especially in the Mexico side, we've seen now the opportunities to drill more and more of the 3-mile laterals. And you saw the results we just put up, not only this past quarter, but over the last year or so. So really, really attractive opportunities.

I think there's going to continue to be opportunities for us to replenish our inventory there. And a lot of this, you mentioned a couple of transactions that have taken place in the broader Permian but specifically in the -- on the Delaware side, you laid out the Conoco's purchase of the Shell acreage. I can tell you, Arun, that we operate wells that are the Shell had non-operated and has interest in. We have opportunities to do a lot more trading and I think optimizing our portfolio that's.

The first thing I'll add to and I think that's going to optimize -- even further optimize the returns we get. And then there's -- there are going to be other small opportunities out there. We're really focused on bolt-on type of things that really make industrial -- make a lot of sense from an industrial perspective. And so I think you'll continue to see that.

I'll also just weigh in. Over the last two days, we've had an internal tech conference. And when I look at the unbelievable technology that's being employed by Devon today as we find more and more opportunities within the acreage we are already operating, I got real excited. And I think the entire organization is excited about what the future looks like.

And so those are a couple of ideas that we have and I'm confident that our team will continue to keep a long runway of inventory opportunities in front of us. Clay, you may want to add to that.

Clay Gaspar -- Chief Operating Officer

Yeah. Thanks, Rick. I'll just kind of reiterate a couple of your points. Number one, Arun, as you well know, we're always trying to drill our best well next.

And it's amazing to me, as long as we've all been in this business, today we're drilling the best wells we've ever drilled. And it's not because we save them until today. It's because our teams have continued to innovate, get better. How do we get on the efficiency side? How do we figure out how to wring out the most optimal amount of resource from these incredible plays? How do we understand the plays? What Rick was just talking about some of the technology we're involving today is absolutely outstanding.

Second tip of the hat I'd like to provide is to the land team. And Rick mentioned this, the incredible work that's been done in trading around our core areas just makes us all better. I mean both parties typically in the trade, where we're like for like exchanging, at the same time we're extending laterals we're building efficiencies in the ground floor level, and that just makes us better. And so those things will continue.

Specific to your comment on moving some of the derisk -- the upside inventory to the derisked inventory, absolutely that will happen. The luxury that we have today is because we have so much quality out in front of us. We don't have to invest a significant amount into that derisking program. So we could accelerate it faster but we're going to be very measured about this.

By far, most of our investment is just plowing the ground, driving down costs, getting exceptionally efficient, and just ringing out that free cash flow machine that we talk about strategically. So that will -- I have a high degree of confidence in that 2,500 wells. And by the way, it's a whole lot more than 2,500. We'll eventually roll into the derisk bucket.

And it's not too much of a stretch to say when we drill those. Some of those will be the best wells that we've ever drill, even five and 10 years from now.

Arun Jayaram -- JPMorgan Chase and Company -- Analyst

Great. Thanks for that, and my follow up is for Jeff. I wondered if you could just maybe provide a little bit more color on how management, the board's thinking about the buyback. Jeff, you mentioned that maybe post the blackout in a couple of days you would opportunistically look to be back perhaps using the buyback authorization, but I wanted to get a sense of maybe you could better define this sense of opportunistic nature of the buyback.

And thoughts on do you think you'd get the billion dollars done by year-end 2022?

Jeff Ritenour -- Chief Financial Officer

Absolutely, Arun. I mean where we sit today and we look at -- and I would point you back to Slide 6, which was in our deck. If you look at you know pick your price deck, about 15% to 20% free cash flow yield, we think an investment in Devon stock is an absolute no brainer, where we sit today. You compare that to the multiples we're trading at relative to our highest quality peers, probably again a half turn to a turn below those folks.

And I think it was a pretty easy decision for our board to go ahead and approve the billion dollar share repurchase. And so as I made comments in our open, once we get to the blackout here at the end of this week, we expect to jump into the market and really get after it. So we're excited about the investment opportunity that we have. Married with the fixed and variable dividend framework, I mean just to be candid, there just isn't anybody else in our sector that's providing this kind of cash returns to our shareholders.

Arun Jayaram -- JPMorgan Chase and Company -- Analyst

Great. Thanks a lot.

Operator

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

Neil Mehta -- Goldman Sachs -- Analyst

Good morning, team, and nice quarter here. I want to start off on the NGL side of the equation because it doesn't get enough attention in your portfolio but it's been a hidden driver for a lot of this cash flow generation. Can you just remind us how that business is set up here as you think about fourth quarter into 2022? Obviously, Anadarko is a little bit more liquids rich and how that changes where that asset in particular competes within the portfolio.

Clay Gaspar -- Chief Operating Officer

Yeah. No, Neil, it's a great question. We appreciate you making the point for us because again it's been a real high point for us throughout this year, obviously, with the tailwind that we've seen on NGL prices. Just to remind folks, in 2021, we're producing over 130,000 barrels a day of NGLs and I would expect moving into 2022, you'll see that grow a bit moving forward.

So it's been a really nice tailwind for us. And as you point out, it's not an insignificant portion of the cash flow that we're delivering and the free cash flow that we're delivering this year, and expect that to grow you know moving into '22.

Rick Muncrief -- President and Chief Executive Officer

Really to expand on that a little bit, and you have -- certainly you and your firm have your own view but ours is that we're pretty constructive on NGL pricing as the world wide economy just continues to get stronger and stronger. And so I think a point's been made. It's a real nice -- not real nice position to be in when you can see these kind of volumes to be put up and helps cash flow in a big way.

Neil Mehta -- Goldman Sachs -- Analyst

Yeah. I agree with that point. And then the follow up is just when you think about moving outside of this maintenance mode type of program that the business model that's been set up here is generate a lot of free cash and return that capital to shareholders. But when do you think it makes us actually pursue a modest degree of growth and what are the signals that you're looking for whether it's demand signals, OPEC spare capacity to make that call?

Rick Muncrief -- President and Chief Executive Officer

Yeah, I think what we're looking at it, Neil, is we're really focused, as we said in our remarks, on cash flow per share growth. And it's -- when you start looking at 40% cash flow growth and in '22 -- over '21 just keeping your volumes flat,  absolute volume growth really doesn't have appeal. We just need to we need to make sure that the -- as we said, the OPEC+ barrels are back in the market, and we'll watch things. We'll be thoughtful.

But if you think about our retiring or repurchasing actually for 4% of your shares, you are going to get some per share production growth and I think most of the investors that we talk to, that's plenty good for them. And that's how we're thinking about it.

Neil Mehta -- Goldman Sachs -- Analyst

Thanks, Rick.

Operator

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

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Hey, good morning, everybody. I've had some phone line issues this morning so I just want to check if you can all hear me OK.

Rick Muncrief -- President and Chief Executive Officer

We sure can.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Excellent. Well, thanks, Rick, for the presentation. I got a couple of questions, I guess. The first one is on the break even.

And I just want to be sure I'm reading this right. So your $30 sustaining capital breakeven is using 250 gas, which is obviously quite a bit below where the strip is right now. So given your comments about your gas exposure, if you use current strip what do you think your sustainable breakeven is? And if I may tag on maybe for that, what is the embedded cash tax assumption in that breakeven?

Clay Gaspar -- Chief Operating Officer

Yeah, Doug. Just I, frankly, haven't done the math to give you an exact number but it's certainly lower and I would guess somewhere in the mid-20s would be the breakeven using the current strip of the, call it, $3 to $4 on gas prices and then NGL as well.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

On a cash tax basis?

Clay Gaspar -- Chief Operating Officer

Yeah, yeah. On a cash tax basis you'll see we kind of noted that on again on Slide 6 in our presentation. Where things sit today and where commodity prices sit, we'll have to see how the rest of this year shakes out to give you an exact answer on where our NOL balance will land. But generally speaking, we think it's going to be around $3 billion that we'll carry forward into 2022.

On top of that, we'll have some foreign tax credits, which will also help us shield some of our income in next year. So again depending on where commodity prices shake out, we'll be in a pretty good position to shield a fair amount of that taxable income. However, we're guessing it's going to be somewhere in the mid-single digits will kind of be our current tax rate as we move in 2022, and that's what we've assumed in the forecast that we've outlined on that Slide 6 that I referenced earlier.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

OK. Thanks for that. My follow up is -- first of all, Rick, I'm delighted to see the buyback introduced and we'll see how that plays out but, I guess, the question I have is your variable dividend is big not in the context of the total cash return. But I think my view on this which is that it's somewhat backward looking.

I don't think the market necessarily gives you a discounted pull-forward variable dividend as something that they're prepared to recognize. So buybacks a more permanent buy here north per share. Who should we expect the split between the two to evolve over time?

Rick Muncrief -- President and Chief Executive Officer

Well, I think we'll -- the way we're looking at it now, the variable the dividend concept, this is, I guess, here in December will be the fourth quarterly distribution. So I'd say still relatively new. It's been very, very well received. We think it's very prudent.

We agree with your comments on the share repurchase. Those are permanent and meaningful. But I think with the variable dividend, we've had a lot of discussion. Some people have really asked us about are we wanting to bump that up to, say, a 75% threshold or something.

I think, for us, we think the 50% is a very, very prudent level as the others plays out. We talked to the base dividend, this variable dividend, now the share repurchase. And then as Jeff talk about the debt reduction, those are all really, I think, add up to a very, very compelling story for shareholders, something that we feel -- you don't feel really good about. So I think that we'll see how the share repurchase program goes.

I think the question will be down -- this question you're asking, give us a few months. Give us a few quarters and let's see how things play out and what really makes sense but that's really how we're looking at it. I think a balanced approach is pretty hard to compete with. And, Jeff, you may have some additional comments here.

Jeff Ritenour -- Chief Financial Officer

I would just -- I would reiterate that last point, Doug, which is we feel like we're delivering all of the above. So whatever your favorite mechanism for cash returns, an investment in Devon is delivering that. As Rick mentioned, as we move into next year, we settle out through the budget, figure out down to that down the line item how we think the business is going to perform. My guess is we're going to have opportunities to even build further on this framework with the potential to raise the fixed dividend on a go-forward basis and then we'll reevaluate other additions to the framework as we move through the year and and see cash belt.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Guys, let me sort of close out with a comment because you've led the market on this. You've been early to it, and I think you're really changing the perception of what the NGI business model can look like. So congratulations on how things turn out.

Jeff Ritenour -- Chief Financial Officer

Thanks, Doug.

Operator

Your next question comes from the line of Jeanine Wai with Barclays.

Jeanine Wai -- Barclays -- Analyst

Hi. Good morning, everyone. Thanks for taking our questions.

Rick Muncrief -- President and Chief Executive Officer

Absolutely. Good morning, Jeanine and thanks for sending the picture. Congratulations on the young one.

Jeanine Wai -- Barclays -- Analyst

Thank you. She's adorable, and thanks for looking. Maybe just following up on Arun and Doug's questions on the buyback, can you just address how you specifically determine the size and the timeframe of the authorization? And should we think about you revisiting either the buyback or the percent variable payout when you kind of get through a good portion of that billion dollar gross debt reduction or are those decisions independent? I know you just mentioned that the 50% is prudent at this time. You'll have to see how the business performs and it sounds like maybe in a couple of quarters you might revisit that but just maybe digging a little bit deeper on how it relates to the debt reduction.

Jeff Ritenour -- Chief Financial Officer

Yeah, that's right, Jeanine. Appreciate the question. We -- as I mentioned just on the last question, I think that the first thing we'll probably look to add onto our framework would be a potential raise of the fixed dividend. But absolutely, we're going to reconsider, as we work our way through next year, shall we upsize the share repurchase program beyond the billion dollars? If we get to the end of the year and our cash build exceeds our expectations, I think you could consider a special dividend.

And then certainly we would reevaluate the 50% threshold on the variable dividend. However, I would just point out we think there's real value and consistency of maintaining that framework. And so I think generally you'll see us work around the edges on some of these other items that we've talked about. But those are all things that we'll debate with the board as we work our way through the year.

To your question about how do we determine size, really it was just a function of looking forward with our projections using what we think is a rational price deck, normalized price deck, and a billion dollars felt like a fair amount. But again, as I mentioned earlier, we'll reevaluate that as we work our way through it and see how it performs and certainly we'll have the potential to upsize that with our board.

Jeanine Wai -- Barclays -- Analyst

Great. Sounds great. Maybe my -- our second question is on the '22 budget. So we know there's a few more moving pieces in the midstream side and in the other buckets as well.

Are there any opportunities that you can walk us through on the midstream and the other bucket side and how those should trend every year now that the integration of WTX is complete? And I think on the upstream side the $1.9 billion to $2.2 billion forecast, is there anything else there other than inflation that is driving the range? For example, anything on efficiencies or anything macro-related?

Clay Gaspar -- Chief Operating Officer

Hey, Jeanine.  Thanks for the question. This is Clay. Yeah, I would say on the E&P part specifically, we all -- we love that our team continues to be more efficient. There's always that hope and that opportunity ahead.

I can tell you we've got some pretty good headwinds coming toward us as an industry inflationary wise. So will we be able to fully offset inflation? In this case, we have not assumed that we would. We've baked in something north of 10%, call it, 10% to 15% inflation into our E&P operations. And then the above, the other items, midstream, the other spin, some of the corporate capital, and the ESG spin, that's something that we're probably going to lean into a little harder this year.

In the range, you could probably say about $200 million, which would probably be sort of a high watermark. I don't expect this every year but I think there's some opportunities for us to really take some significant steps to build out a little bit ahead make sure that we are being a little bit more forward thinking on some of our infrastructure. And that will allow us to run our operations smoother, including important factors like environmental. So I think this is -- kind of gives you an idea of what we're thinking about and, of course, we'll continue to refine this as we seek board approval.

And next visit with you guys, we'll give -- offer more details.

Jeanine Wai -- Barclays -- Analyst

Thank you very much.

Rick Muncrief -- President and Chief Executive Officer

Thanks.

Operator

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

John Freeman -- Raymond James -- Analyst

Good morning, guys.

Rick Muncrief -- President and Chief Executive Officer

Hey, John.

John Freeman -- Raymond James -- Analyst

Just kind of a follow up on Jeanine's question. So you've mentioned that the drilling efficiencies that you have done a remarkable job on that have compressed the cycle times has been pulling forward activity. I'm curious on 2022 preliminary plan, does that assume that you'll have a static rig and fractures relative to the 16 rigs, five crews you have currently or does that assume potentially doing more with less next year?

Rick Muncrief -- President and Chief Executive Officer

Yeah, I would say, John, it's directionally the same. We consider it flat activity. You know how it works. We'll -- depending on working interest, other factors, rigs will come and go.

We're always upgrading fleets. Contract rolls off, contract rolls on. But -- and directionally, we are flat and consistent in our operations. And I can tell you, it's part of our inflationary hedge is that consistency.

As we look to our suppliers and try and get goal alignment with these important partners, I can tell you what they want to know is that we're going to be very consistent in our operations. Through the fourth quarter of this year, we're not abnormally dropping rigs and trying to monkey with the system and then as we roll into next year. And so I think though -- that level of consistency helps tremendously internally and externally as well.

John Freeman -- Raymond James -- Analyst

Great. And then just my follow-up question, the terrific result in the Boundary Raider project. And just I guess any additional color there in terms of repeatability, kind of running room in that area, any sort of breakthroughs and anything you did on the completion design or anything else that you might get to take to some of the other areas?

Rick Muncrief -- President and Chief Executive Officer

Yeah, John, I think it's -- we're at the point of evolution where it's a million small things. And so I think every new pad that we drill, we're continuing to improve. And it's -- we're shaving minutes and we're shaving just the small single percentage increases on all of these efficiency gains really continue to add up. I think in this particular case, we were sitting on top some amazing geology.

That certainly helps in this business but I think I look across the board and you're right I see the efficiency gains, some of the capital that we saw in the third quarter. And as we roll into fourth quarter that is -- there's some efficiency being baked in from the drilling and from the completion side that, as you know, starts stacking capital up a little bit. We've considered that as we looked at '22. We haven't built additional efficiency gains into '22.

And as I mentioned on a previous question, we've actually acknowledged some pretty pretty significant exposure for inflation. I think that's a prudent step to take.

John Freeman -- Raymond James -- Analyst

Thanks. Appreciate it. Congratulations on a nice quarter.

Rick Muncrief -- President and Chief Executive Officer

Thanks, John.

Operator

Your next question comes from the line of Neal Dingmann with Truist Securities.

Neal Dingmann -- Truist Securities -- Analyst

Good morning, guys. I don't want to belabor the shareholder return. Obviously, that is a topic in its early days. Rick, I remember meeting up with you several months ago, early on and you comment at that time -- this is I think maybe even just the one variable dividend that you thought maybe you weren't being properly compensated.

I'm just wondering, as you sit now with several under your belt, you think you all been properly compensated for these? And if not, would you consider lowering the formula or doing something different on a go-forward?

Rick Muncrief -- President and Chief Executive Officer

Neal, I think we have been rewarded to a degree, I think. But if you Scott Coody the number of phone calls -- inbound phone calls that he's getting from more and more generalist investors and people quite honestly he's never talked to or even heard of, that's extremely encouraging. So I think we have started to see the tip of the iceberg on our recognition, the appreciation of how -- what a strong tool this variable dividend is. So yeah, I think that if you go back our conversation we had several months ago, I think it was still just a little bit of a wait-and-see.

And we talked I think at that time about, interestingly enough, if you're just a yield investor, you're out in mining for yield comparing opportunities. If you look at Bloomberg, Factset, places like that, it just picks up that fixed dividend. It doesn't always contemplate the variables or specials, those sorts of things. So I think it's a little bit of a wait-and-see mode.

Now you fast forward to where we are today and I think we have seen some recognition of that. The feedback we get from our shareholders. We've seen the shareholder base actually change you know a fair amount. So I think the calls we're getting would probably illustrate that, yeah, we're starting to get some get some recognition of the power that -- the variable dividend.

And certainly I think when people open the envelope here at the end of the year on this $0.84 per share dividend, that's a nice one so I think it's going to continue to be very much appreciated. So tip of the iceberg, though.

Neal Dingmann -- Truist Securities -- Analyst

No, I agree. I'm -- good to hear because you guys has certainly been a leader in all of this. And then my follow up is maybe for you or Clay. You can't help but notice when you guys start the presentation on Slide 4 having five distinct great areas and Clay mentioned how strictly they compete for capital.

So with that said, would you consider on some of those areas that maybe won't make it in your vote to the top of line, would you fund those, bring somebody else in as a partner or somebody else to fund those that way or would you more likely think about letting some of those assets go?

Rick Muncrief -- President and Chief Executive Officer

Well, as we stated on several occasions, all five of our assets play a very key role in our going forward strategy. You bring up something -- could you bring in a partner? Yeah, absolutely. That's always something you can do, and the returns that they would get would be, quite honestly, phenomenal and of course we would get would be phenomenal, I think. So that's always an opportunity.

We just want to do the right thing for the long-term success of the company. And I can tell you that we continue in all of our basins to find more and more creative ideas on the resource. And this is the subsurface and then so I think as we get into it a little -- next year or two, we'll always have those opportunities. And we'll evaluate them as they come along but our phone does ring.

So it is something that we contemplate. Clay, you may want to comment on that.

Clay Gaspar -- Chief Operating Officer

Yeah. Thanks, Rick. And, Neal, you know us well, right. I mean we are business folks and we really look for value creation opportunities.

And sometimes that comes in the name of buying assets or selling assets or doing creative structures. All of that's always on the table. We have to be very creative. What I like, I think something we've highlighted this quarter is our joint venture with Dow.

That's a perfect alignment. We had a resource that we knew was not going to compete on a heads-up basis. We also had a little bit of a stagnant time, so we knew that there could be a little bit of kind of start-up friction. We brought in a partner.

They love it. It is a homerun for Dow. It is a homerun for us. And as we cycle through this, we're both winning and it's a great thing for the shareholders because ultimately that asset is being converted into value.

So we love those kind of deals. Both legacy organizations have a very creative bent to them, and so I think that carries through to us going forward. So I look forward to more creative opportunities ahead.

Rick Muncrief -- President and Chief Executive Officer

Neal, I'll add one more thing to that point that Clay just made. And I think that if you look at the legacy of Devon, it's a kind of company that people want to want to work with. And so case in point is this Dow partnership. That's the second one.

The first one was launched back in the Barnett days. And so once you prove that you're a viable partner and that you can make people some money, they will come back.So I'd like to add that.

Neal Dingmann -- Truist Securities -- Analyst

Great detail. Thanks, guys.

Operator

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

Scott Hanold -- RBC Capital Markets -- Analyst

Hey, all. Thanks and congrats on the quarter. I'm going to touch a little bit on 2022 quickly here but when you look at -- maybe can you -- if you can give us some perspective on how big the non-operated part of that budget is? And obviously outside of the Eagle Ford but in places like the Permian Basin and even Oklahoma, how much non-op spend do you do you have right now?

Clay Gaspar -- Chief Operating Officer

So, Scott, speaking of partnerships, we have a partnership in the Delaware where we have a partner that we have prescribed agreement in place where we can offload some of the non-op. Mainly because a non-op is very hard to budget for. And speaking from our own prior experience, when you bust the budget and it's on somebody else's fourth quarter activity, it can be a little bit frustrating. So again we have a creative structure in place, very beneficial to us, very beneficial to our partner that act as a little bit of a shock absorber.

So as we think about opportunities in other areas and as commodity price increases and we see some non-op partners lean into it a little bit, we'll consider those options. But I think it's probably $50 million to $100 million around the company is probably in the right ballpark.

Scott Hanold -- RBC Capital Markets -- Analyst

Got it. Makes a lot of sense. And obviously, you guys's operational performance has been outstanding and it's not just the last quarter or two, it's been for quite some time. And when you think about managing growth based on the old macro right now, if you're in a position where you are outperforming next year, would the plan be to taper activity to stay within sort of a flattish growth outlook? Or would you drop capex a little bit to stay more flat?

Clay Gaspar -- Chief Operating Officer

Yeah, I hear you. And I -- that's always the challenge, right.As we do better, become more efficient, the acceleration causes us to push toward the high side of the capital range. It's what we're experiencing in the third and fourth quarter of this year. I hope we have that same problem.

What I'll tell you is we are going to really try hard to honor the high side of that range and if necessary, then we would trim back on activity to make sure we stayed inside that range. It's not something we take lightly. Like I said earlier, this is very disruptive to internal and external operations. And so we don't take that kind of operational scaling up and down lightly.

I would tell you that it's something we plan to honor and to be very consistent in. And sometimes there's other creative ways to make sure that we still meet our capital guidance and continue the incredible consistency that we have rolling.

Scott Hanold -- RBC Capital Markets -- Analyst

Got it. No, I appreciate that. And one really quick on for Jeff. Jeff, you mentioned the tax attributes of around $3 billion, and that seems to hold off through 2022.

Is it fair to assume at strip like some time say mid-2023, a lot of that is utilized? Yeah, that's right.

Jeff Ritenour -- Chief Financial Officer

And just to be clear, in 2022 at the current strip prices, we would expect to base some cash taxes and that's the assumptions we can outline on the slide deck. But certainly as you move into 2023, if we maintain this sort of price level through this next year, you're absolutely going to be in a cash tax position and you'll see that current tax ratio move higher.

Scott Hanold -- RBC Capital Markets -- Analyst

OK. High class problem. Thanks, guys.

Operator

Your next question comes from the line of Matthew Portillo with TPH.

Matthew Portillo -- Tudor, Pickering, Holt, and Company -- Analyst

Morning, all. Maybe a question for Clay. Just on the PRB, I was curious if you could give us an update on your learnings from the delineation in the Niobrara and what you would need to see from either a wild productivity perspective or from a cost perspective to feed that asset more capital over the medium term.

Clay Gaspar -- Chief Operating Officer

Yeah, Matt. This is one of the areas that doesn't get a lot of spotlight. So, one, I appreciate the question and being able to talk about it. This is the massive oil in place resource.

There is no question. As we think about historical exploration, exploring is figuring out if there's oil in place. We're past exploration. Now it's figuring out how do we make -- how do we develop this in an economically competitive way in the portfolio that we have? And therein lies the challenge.

The current the current delivery on economics doesn't compete in with the Delaware Basin. Obviously, that is a tough portfolio to compete in. So let's think about it. We've drilled a couple of 3 mile laterals that we brought on earlier this year.

I can tell you they're really strong. We like the returns and they will compete. They have very strong economics. We've got a lot of repeatability on that.

And so I look over to maybe how we did something with the Anadarko Basin. If it's not competing in our basin, how do we creatively create value for shareholders for an asset that sits in our portfolio? And there's a number of ways to do that. Clearly other industry peers are active in the basin. We look to learn from them.

We look to partner with them. All of that's on the table. Certainly bringing in outside funding is certainly on the table. The homework that we need to do is continue to improve on the repeatability and the certainty of the outcome.

And that allows us to negotiate the best opportunity for us to really wring out the value.

Matthew Portillo -- Tudor, Pickering, Holt, and Company -- Analyst

Perfect. And then just maybe a follow up question on after specific capital allocation, you've had some absolutely phenomenal results around the acreage in Lee, on Eddy County and then some of the state line acreage some WPX. Just curious how Felix stacks up today, what you kind of learned from your updated development program there, and how we should think about the return profile of that position in the Southern Delaware Basin versus your more northerly acreage.

Rick Muncrief -- President and Chief Executive Officer

Yeah, good question. As we draw the circles, we have some Haley development that's in, what we call, the monument draw which is mostly Felix. The Haley stuff was kind of in-between state line and the eastern most side of the basin. That pad recently came on during the third quarter, big development.

I think 10 or 12 wells, outstanding results. So we're excited about that. Clearly as you move further east, things just get more challenging. The steering gets a little more difficult the economics get a little bit more difficult.

And again, in this super competitive portfolio that we have, it's just the eastern most stuff is not commanding the most capital today. So as we look at the depth of inventory in Lee and Eddy and really Loving counties, that's where the lion's share of our capital activity will be.

Matthew Portillo -- Tudor, Pickering, Holt, and Company -- Analyst

Thank you.

Duration: 65 minutes

Call participants:

Scott Coody -- Vice President, Investor Relations

Rick Muncrief -- President and Chief Executive Officer

Clay Gaspar -- Chief Operating Officer

Jeff Ritenour -- Chief Financial Officer

Arun Jayaram -- JPMorgan Chase and Company -- Analyst

Neil Mehta -- Goldman Sachs -- Analyst

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Jeanine Wai -- Barclays -- Analyst

John Freeman -- Raymond James -- Analyst

Neal Dingmann -- Truist Securities -- Analyst

Scott Hanold -- RBC Capital Markets -- Analyst

Matthew Portillo -- Tudor, Pickering, Holt, and Company -- Analyst

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