Devon Energy (DVN 0.06%) worked hard during the oil market downturn to transform into a company that could thrive at lower oil prices. Those efforts started to pay dividends during the third quarter when the company delivered excellent results despite the impact of Hurricane Harvey. It's also on pace to significantly increase oil production this year.
That said, Devon's focus going forward isn't just on increasing production. That was evident by the comments of CEO Dave Hager on the accompanying conference call, where he laid out the company's "2020 Vision." Here are three things he wants investors to know about that strategic plan.
Image source: Getty Images.
1. The returns are the primary objective
Hager led off his prepared remarks by unveiling the company's strategic direction for the next few years, which it branded its "2020 Vision." He laid the groundwork by saying:
With the "2020 Vision," our top objective is to deliver attractive, peer-leading returns on invested capital for our shareholders. While the disciplined pursuit of returns is not new at Devon, our "2020 Vision" will further refine our focus on maximizing full-cycle returns at the corporate level.
In other words, Devon crystalized that its focus is not to spend money just to drill more wells and grow production but to invest so it can earn the highest possible returns. That returns-focused vision would differentiate Devon from the "industry's historical behavior of aggressively chasing top-line growth at the ultimate expense of shareholders," according to Hager.
More drillers are turning away from the industry's growth-focused approach and planning on growing shareholder value instead. Encana (ECA 0.07%), for example, recently updated its five-year plan, which highlighted how much it could increase cash flow. Encana stated that it intends on improving its return on capital employed from 10% to 15% by focusing future investments on drilling its premium return inventory, which are those wells that can achieve a minimum return hurdle of 35% at $50 oil. That approach would enable Encana to grow cash flow by a 25% compound annual rate through 2022 at current oil prices. In fact, it estimates that it can achieve that growth rate while generating about $1.5 billion in free cash flow, which shows that production growth isn't its primary aim.
2. Where and how we drill matters more than anything else
To accomplish Devon's "2020 Vision," Hager stated that disciplined capital allocation was only part of the story. He added:
It is equally important to possess the right asset portfolio and get the most out of these assets with superior execution. And at Devon we are truly advantaged with our world-class acreage positions in the STACK and Delaware Basin. The quality and size of these two franchise assets are unmatched in the industry, with exposure to more than 30,000 potential drilling locations, concentrated in the economic core of these plays.
Hager points out that Devon's vision wouldn't be possible if the company didn't possess top-tier positions in two of the best shale plays in the country. However, what's just as important as those resources is that the company develops them in the most efficient matter so it can maximize returns. Therefore, it will continue embracing new technologies and optimizing well completion designs so it can complete wells faster and deliver better production results to squeeze the most value out of its world-class assets.
Image source: Getty Images.
3. We'll sell noncore assets to accelerate growth and strengthen our balance sheet
Devon's focus on drilling for returns will lead it to invest the bulk of its capital into its two franchise assets going forward. Because of that, Hager said:
The next phase of our "2020 Vision" is to further high-grade our resource-rich portfolio. Given the massive opportunity we have in the STACK and Delaware plays, we see the potential to monetize several billion dollars of less competitive assets within our portfolio in a very thoughtful and measured fashion over the next few years.
Devon has plenty of assets it can look to sell over the next few years since it holds land in the Eagle Ford shale, Barnett shale, Rockies, and Canadian oil sands. Meanwhile, Hager noted that the proceeds from these future sales would enable the company to pay down debt, with its aim to have a "fortress balance sheet with a net debt to EBITDA target of 1.0 to 1.5 times by the end of the decade." In addition, it will reinvest some of the proceeds into its core business as well as return cash to shareholders. That combination of a strengthening balance sheet, high-return growth, and increasing cash returns to investors should steadily grow the value of Devon's stock price.
Growing profits, not just production
Hager cast his vision for Devon Energy, which he sees becoming a company focused on drilling for returns and not solely for more oil. That approach should grow the company's profits at a much faster rate than production, which is what should create the most value for investors. That makes Devon a compelling oil stock to consider because it could deliver market-beating gains in the coming years even if oil remains low.
