After sliding for most of the last year due to underinvestment, Devon Energy's (NYSE:DVN) output bounced back in a big way during the first quarter. The shale-focused driller delivered a 17% uptick in oil production from the U.S., which helped drive a 5% jump in companywide output. What's noteworthy about that growth is that the company's secret sauce during the quarter wasn't just its ability to grow production, but how it used efficiency gains and innovation to deliver well results way above its expectations.

Drilling down into the numbers

Devon Energy's production averaged 563,000 barrels of oil equivalent per day (BOE/D) during the first quarter, up 5% versus last quarter thanks to a 7% increase in oil output, which averaged 261,000 barrels per day (BPD). That result was an impressive 5,000 BPD above the top end of the company's guidance range. Fueling that growth were the stellar results from the company's U.S. shale plays, where production averaged 123,000 BPD, up 17% versus last quarter thanks to higher completion activities in the Eagle Ford and STACK regions and impressive well productivity. 

Drilling rig among agricultural fields.

Image source: Getty Images.

Devon's focus on growing U.S. oil output is paying big dividends because this production earns the highest margins in its portfolio. As a result, when that expectation-beating high-margin output combined with the company's continued war against costs, which are down more than $1 billion on an annualized basis since peaking in 2014, it enabled Devon to deliver core earnings of $217 million, or $0.41 per share, during the quarter. That was not only well above the $131 million, or $0.25 per share, it reported last quarter, but the results beat analyst consensus by $0.01 per share.

Meanwhile, operating cash flow was even better at $834 million, which is up 54% from last quarter. Given that the company only spent $747 million on capex during the quarter, it was able to generate nearly $100 million in free cash flow, which is quite a feat considering it has been outspending cash flow by a wide margin.

The secret to why Devon's results were so good

What's worth noting about the quarter is that Devon Energy's latest wells produced better results than anticipated. Overall, it completed 70 wells during the quarter, which combined to achieve an average 30-day initial production rate of 1,800 BOE/d. One area where the company experienced tremendous success was in the Rockies, where it brought four wells on line during the quarter that delivered 30-day initial production rates averaging 1,800 BOE/d, which was 80% above what the company thought these wells would produce during that time frame. In the meantime, its latest well results in the Eagle Ford shale were also robust. In fact, the 39 wells Devon completed during the quarter delivered initial 30-day rates averaging 2,100 BOE/d, which continues the company's trend of achieving industry-leading rates in the Eagle Ford that have exceeded the peer average by 50% over the past year.

One of the contributing factors to its success in the Eagle Ford are innovations such as its "diamond stack" pilot, which is a nine-well test that landed wells in three zones using a diamond pattern. These wells not only delivered excellent production results but can be completed quickly and are a big reason why Devon's drilling times are down 90% since 2014, thereby boosting returns. 

That's just one of the many examples of how drillers are using innovation to improve performance in the region. Another example of a needle-moving innovation during the first quarter was Encana's (NYSE:ECA) new advanced completion design. The first three wells Encana completed with that design achieved an average initial production rate of 1,300 BOE/d, while its five most recent wells delivered 2,150 BOE/d. Those results are well above the 900 BOE/d expectation Encana had for wells in the Eagle Ford.

Devon Energy, like Encana, isn't done innovating, either, since both companies are starting to roll out massive multiwell pad developments to boost productivity. In Devon's case, it plans to complete 10-15 wells per unit in the STACK and Delaware Basin in the future, up from the traditional two to four well pads. This development plan should speed up the drilling process and lower costs, leading to higher returns. It's a similar approach to Cube Encana, which is a large multiwell pad designed to target up to five shale formations via a dozen wells from a single pad. As these companies continue to fine-tune their process, there is the potential to capture additional efficiency and productivity gains, which could push production even higher this year than the already lofty expectations.

Investor takeaway

Devon Energy continues to turn things around after a challenging 2016. While higher oil prices and the company's ability to cut costs are certainly playing a role in its financial turnaround, investors can't overlook its operational successes. Through a focus on innovation and efficiency gains, the company can produce more oil and gas out of new wells than it has in the past, which is why it expects to deliver robust growth over the next few years even if oil prices don't recover much more.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy. The Motley Fool has a disclosure policy.