Devon Energy Aktie

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

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

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

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

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

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

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

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

Absolutely.

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

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

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

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

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

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

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

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

A great entry price one might call.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Absolutely.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thanks, Arun. Appreciate it, everybody.

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

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

Good morning, and thank you for joining us on the call today. Last night, we issued Devon's first quarter 2026 earnings release and presentation materials. Throughout the call today, we will make references to these materials to support prepared remarks. The release and slides can be found in the Investors section of the Devon website.

Joining me on the call today are Clay Gaspar, President and Chief Executive Officer; Jeff Ritenour, Chief Financial Officer; John Raines, SVP, Asset Management; Tom Hellman, SVP, E&P Operations; and Trey Lowe, SVP and Chief Technology Officer.

As a reminder, this call will include forward-looking statements as defined under U.S. securities laws. These statements involve risks and uncertainties that may cause actual results to differ materially from our forecast. Please refer to the cautionary language and risk factors provided in the SEC filings and earnings materials.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Jeff, additional comments?

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

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

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

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

Trey, do you have other comments there?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Your next question comes from Doug Leggate of Wolfe Research.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good morning, and thank you for joining us on the call today. Last night, we issued Devon's Fourth Quarter and Year-end 2025 earnings release and presentation materials. Throughout the call today, we will make references to these materials to support prepared remarks. The release and slides can be found in the Investors section of the Devon website.

Joining me on the call today are Clay Gaspar, President and Chief Executive Officer; Jeff Ritenour, our Chief Financial Officer; John Raines, SVP, Asset Management; Tom Hellman, SVP, E&P Operations; and Trey Lowe, SVP and Chief Technology Officer.

As a reminder, this conference call will include forward-looking statements as defined under U.S. securities laws. These statements involve risks and uncertainties that may cause actual results to differ materially from our forecast. Please refer to the cautionary language and risk factors provided in our SEC filings and earnings materials.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our next question comes from Neil Dingmann with William Blair.

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

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

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

The next question comes from Doug Leggate with Wolfe Research.

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

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

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

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

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

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

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

Can you confirm the Kuwait interest, Clay?

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

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

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

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

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

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

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

The next question comes from John Freeman with Raymond James.

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

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

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

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

The next question comes from Arun Jayaram with JPMorgan.

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

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

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

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

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

The next question comes from Phillip Jungwirth with BMO.

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

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

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

The next question comes from Charles Meade with Johnson Rice.

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

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

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

The next question comes from Paul Cheng with Scotiabank.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our final question today comes from Matthew Portillo with TPH.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

With that, I will turn it over to Clay.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our next question comes from Neal Dingmann from William Blair.

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

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

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

Our next question comes from Doug Leggate from Wolfe Research.

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

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

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

Our next question comes from Nitin Kumar from Mizuho.

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

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

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

Our next question comes from Arun Jayaram from JPMorgan.

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

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

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

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

Our next question comes from Scott Hanold from RBC.

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

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

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

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

Our next question comes from Phillip Jungwirth from BMO.

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

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

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

Our next question comes from Betty Jiang from Barclays.

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

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

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

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

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

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

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

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

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

Our next question comes from Lloyd Byrne from Jefferies.

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

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

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

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

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

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

Our next question comes from Paul Cheng from Scotiabank.

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

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

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

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

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

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

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

Our next question comes from Charles Meade from Johnson Rice.

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

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

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

Our next question comes from Leo Mariani from ROTH.

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

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

Our next question comes from Noel Parks from Tuohy Brothers.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

One is better?

Both.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bring it on brother.

Had an intervention with me when he...

I honestly did.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

$65 to $70.

WTI.

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

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

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

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

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

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

Yes. Thanks, everybody.

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

Good morning, and thank you for joining us on the call today. Last night, we issued Devon's third quarter earnings release and presentation materials. Throughout the call today, we will make references to these materials to support prepared remarks. The release and slides can be found in the Investors section of the Devon website.

Joining me on the call today are Clay Gaspar, Chief Executive Officer; Jeff Ritenour, Chief Financial Officer; John Raines, SVP, Asset Management; Tom Hellman, SVP E&P Operations; and Trey Lowe, SVP and Chief Technology Officer.

As a reminder, this call will include forward-looking statements as defined under U.S. securities laws. These statements involve risks and uncertainties that may cause actual results to differ materially from our forecast. Please refer to the cautionary language and risk factors provided in our SEC filings and earnings materials.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our first question comes from Neil Mehta with Goldman Sachs.

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

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

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

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

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

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

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

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

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

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

Our next question comes from Arun Jayaram with JPMorgan.

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

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

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

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

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

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

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

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

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

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

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

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

Our next question comes from Neal Dingmann with William Blair.

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

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

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

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

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

Our next question comes from Doug Leggate with Wolfe Research.

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

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

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

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

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

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

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

Thank you, Doug. Appreciate it.

Our next question comes from Scott Gruber with Citigroup.

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

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

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

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

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

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

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

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

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

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

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

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

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

John, anything else you want to add?

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

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

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

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

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

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

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

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

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

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

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

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

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

All right. Moving on to our next one. Clay Gaspar, CEO of Devon Energy. Clay, I was just complimenting you on how great of a job Devon is doing this year with just crushing it on the cost side.

I have to say there's TR walking out -- that's Teddy Roosevelt, the great grandson of the other Teddy Roosevelt. I want to say -- Hi Teddy, how are you doing? Yes, you as well. Always a pleasure.

Okay. Well, we'll get a good start on this conversation.

Thanks for the compliment, Betty. It's a hard fight. I mean we're in it every day, and our credibility is always on display every quarter, we have a report card that we display as a publicly traded company, and we get -- we have to earn it every single day. So I appreciate the compliments on behalf of the team, things are going quite well.

Yes. No, the -- so digging a bit deeper on the $1 billion cost optimization. When you guys first came out with a target, it was -- it was surprising.

Rightfully so. It's a big number.

It's a big number on a maturing portfolio that -- how did you guys evaluate that opportunity? How are you able to execute it so fast? Like was there something changed organizationally and execution-wise that enable you to deliver that?

Yes. I think one of the funniest things I heard was, all right, Clay, you've been sitting in the COO seat. So if you've had all this value, why don't you just jump in and grab it? And it's -- I think it was -- there's a window of opportunities. And I think in a publicly traded company, we're over a 50-year-old company, $20 billion, $30 billion organization, I think there's always opportunity to wring out just a little bit more value. In this case, we really set a pretty lofty goal. And so with the change in CEO, we said, okay, how do we maximize the opportunity of this window? So Jeff Ritenour and I sat down at the very beginning, so okay, what's that in our store? What's the one thing that we can point to that really incite the organization entirely towards a common goal. And so we selected free cash flow as that overall target.

No doubt about it, the drilling guys, the completing folks, the guys that are really focused on the capital. They get a ton of attention because of the incredible work that they're doing to drive that cost structure down. And then you get to folks really on the production side that, yes, every day, they're managing chokes, they're looking at artificial lift, they're managing cost structure. They have a great opportunity to add value to the organization every single day. But there's another hundreds, if not thousands of people in the organization that also need to feel that level of excitement around we can do just a little bit more. When we pulled the number together, we had a team, a small team that came together, Scott Coody was part of it. And we said, okay, what's the big aspirational goal? This is the target we want to go to. We settled in on free cash flow and the initial approach was we can do $700 million in 3 years.

And I said, yes, $700 million is a good number, but $1 billion is a whole lot, $1 billion with your little pinky on your corner of your mouth is a whole lot cooler number. And I said about that 3 years, our investment community can't think in terms of 3 years. So next year has a lot better ring to it. And so we settled on $1 billion next year, which is by year-end '26, really manifesting in '27. And I think that was quite aspirational. We didn't know how we were going to get there. We had a pretty good handle on a few things that we already had line of sight to. And we really started this free cash flow focus was we had some work that we've been doing for a couple of years that we were going to be able to announce more publicly and some of these were like midstream contracts and other things that we're going to seriously lower our cost structure.

And each one of these deals were probably not 8K worthy themselves. But you start drawing your -- pulling your arms around the preponderance of these number of operations and opportunities and you start getting into these really big numbers. And so I think it was as much about manifesting the opportunity, really drawing to that North Star. We had a pretty good runway on some big projects already underway. And then most importantly, getting the organization really pointed to that common North Star that everyone, every single person can contribute. There's a whole host of technology kind of a complement to all of this, but everybody can impact this free cash flow. And I think really drawing the organization towards that has been really great.

Well, I think we're just less than a year into this. So is the team going like, okay, everything we thought we saw before, now we're adding there's more and...

It's success begets success. And it is just -- it gets people excited about wait a minute, I can contribute to this. And I mentioned the technology piece. One of the organizational changes that we had was we promoted our Chief Technology Officer to the Executive Committee, direct report to me. And that is not just symbolic. That is -- Trey Lowe is his name. He's a long-time Devon guy, operational background, very savvy on the business that we do, but it's always been a self-described tech nerd. And so you think about that 1-2 combination of truly understanding the business, but seeing everything through a technology-oriented lens, I think is also a great opportunity. So he's not just our CTO, he's also the individual, the executive that is leading this business optimization.

And so when I talk about it having a technology bent, it truly has a technology bent because the core leader to that process is our technology leader. And so everything is viewed through the lens of efficiency, optimization, value creation. And then Tom Hellman, who's with us in the audience today, is a new member, came in from the outside to join the Executive Committee. And Tom said it well. He's like, look, if we're doing all this technology stuff and we're making jobs easier or we're saving people time in the day, that doesn't pay the bills. I want barrels or I want dollars. And I just love that real nature of technology is not just here for fun, it's about creating value. And all of that contributes to this $1 billion target and really helps us continue to hone in on this North Star.

Great. I was going to ask this later, but since you brought up technology and AI integration is all the rage this year, how much of what you see -- like the leading -- the things are moving so fast and improving so quickly that are you -- how much of that are you getting -- are you implementing internally? And how transformative of doing the leading edge integrating into the organization?

I'm about to jump out of my feet. I'm so excited. Count me as an absolute AI bull. Whatever hyperbole you want to lay out there, I think it's going to be bigger than that. We are seeing significant and very material benefits. One of the ways that we kind of set this up to begin with was thinking about certainly, when ChatGPT came out in November of '22 -- by February of '22, we're already thinking internally, how in the world do we leverage this. At first, it was getting -- planning our next vacation or finding the chili recipe to win the chili cook offer, something just anything to use it, and we're really trying to push the use cases around the organization, knowing that this is a solution, not yet knowing what the challenges or problems that we're going to solve.

Quickly, I've met resistance from my General Counsel, and it was a brilliant interaction between executive members because I was pushing as everybody has had to use this. We got to turn the organization loose on this. And his reminder was, by the way, we don't have any securities in place around this. We start loading financials up into ChatGPT. That is a horrible outcome for the organization. And so by March of '23, we hit pause. By May of '23, we launched our first ChatDVN. So this is a fully firewall-protected internal platform that we can then leverage all of the latest large language models and have the safety and security of turning the organization loose on ChatDVN. Now 2 years later, we were on ChatDVN 3.0. We've had 100% training around the company on a ChatDVN-101 class. So everybody has been through it. Inside of the Oklahoma City headquarters, we have near 100% utilization rate. So think about that. Every attorney, every accountant, not just the geoscientists and the engineers, nearly every person in that headquarters has used it in one capacity or another, and they're starting to grow that momentum.

As of a couple of weeks ago, we hit a 50% milestone. On that particular day, 50% of the organization hit it and used it in one capacity or another. And so that momentum is starting to grow. One of the early goals was how do we take what we characterize, if you think of time use studies, we probably spend 75% of our time looking for data and 25% of the time analyzing the data. How do we flip flop that? How do we take 75% of the time using the data and only 25% actually looking for the data. And what that manifests in is a 3x multiplier on the productivity of those employees. But I'll go back to Tom's comment. If it doesn't translate into dollars or barrels, it's -- we're not winning yet. And so how do we evolve from time use studies and efficiency to real value creation.

And I could go on for a lot more than 19 minutes on use cases, but we are actually seeing -- we had a Board meeting yesterday where we're giving some updates to the Board. We brought in one of our drilling supervisors, and he's talking about real-world examples on a daily basis of driving efficiencies throughout the organization on the drilling side, manifesting in more efficient drill times and minimizing bit destruction and then ultimately driving wells down faster for more efficient cost. And we see that throughout the organization. So count me as a pro AI guy.

Okay. So what I heard so far is a lot more room for efficiency gains, lower cost, better productivity and all that. But the one area of AI application that they were wondering about is the whole resource recovery. Whether that -- because that's a big question mark on the industry is the resource duration and inventory depth. Do you find using AI, looking at the data that you have in-house is able to unlock new resources that's now economical with the lower cost that you're able to develop that asset?

I think about 3 points in time. The first point in time is when the first opportunity for us to actually see the rock that we're drilling. So we're taking rock samples. You're getting cuttings as you're drilling the wells. You're taking these cuttings at the surface, and you typically have a geologist on location that's describing those cuttings, and this type of sandstone, this color, these kind of angular features. And for the first time, you actually hold that rock in your hand and you know what you're doing. Understanding the rock is pretty incredibly important. We're now taking AI, and guess what, it's so much better than geologists consistently 24/7, 365, on holiday weekends, at 3:00 in the morning on doing that description consistently and productively than we've ever been able to do before, a small example. Actually drilling the wells. I talked about some of those examples on how we're drilling more efficiently and using AI to steer the wells and efficiently get those wells down.

From a production standpoint, we're using AI now thinking about how do you control a super system of wells, maybe you have 20 or 30 wells, all tied back to artificial lift, okay? One type of artificial lift is centralized gas lift. So you've got central compression facilities directing certain amounts of gas to individual wells. And then all those wells are tied back to another system, a midstream system, okay? That's tied back to compression, that's tied back to ambient temperatures and all the other dynamic things that are going on. So how do you optimize that wells productivity giving all of those -- the interconnectedness of those constraints? I can tell you, a year ago, it's a human being watching gauges, bouncing around, looking at automation because we gather a lot of this data into a central facility and then either calling out and physically adjusting chokes or compressor settings or maybe at the push of a button, making those adjustments.

Now bring in AI, it's constantly, again, 24/7, 365, looking at all those systems and all of those opportunities to make adjustments and doing that real time. That is an absolute step change. So how do you measure that? Certainly in productivity, but looking at base declines and looking at uptime efficiency gains, really ring the cash register and create more value.

Got it. And that's what's driving the production...

Sorry, Betty, I thought about one more. Sorry to interrupt. You asked specifically about exploration. There's a whole another effort thinking about how do you take the deep learning models like an O3 type model and then apply that to geologic understanding and then thinking in conjunction with our brilliant geologists, brilliant engineers to think about how do we create more value from these opportunities, bypass zones, bypass basins, and that's some really exciting work as well. Sorry, back to you.

Great. And now what you were saying about the production optimism -- that ties back to the cost optimization program, production optimization is a piece of it. I forgot whether that's a $300 million or $400 million number. That's the -- but that's -- everything that you were saying about optimizing the decline and then the cycle time is what speed -- or optimizing the lift using AI, and that's what's enabling the production optimization. Is that...

That's part of it. Thinking about how do we leverage technology, how do we use the genius human beings in conjunction with the technology to lower base declines, improve recovery factors, ultimately manifesting in better production. And then the byproduct -- I'm sorry, I get really excited about this. The byproduct of improving that base decline and improving that uptime is that now assuming that we hold the line on this maintenance capital, so we're kind of a mid-380s oil-producing company, let's say we just continue to run that forward. Now the maintenance capital required, the number of sticks, the amount of that precious inventory that we consume every year gets a little bit lighter lift each year, okay? So think of the business optimization is also an inventory enhancer.

Absolutely. It's a virtuous cycle. All right. I can dig out on this a lot more, but back to the free cash flow trajectory. So the maintenance CapEx actually feeds into this question. Like how to think about the business free cash flow generative ability beyond this year? Because you have the cost tailwind, you got the tax tailwind, you've got the...

Maturing of the portfolio...

Yes. maturing of the portfolio where it gets less capital intensive. So how do you see that free cash flow wedge expanding?

Yes. That's the challenge we fight every day, right? We're always trying to drill our best wells first. Inevitably, we are chewing through some really good inventory. And inevitably, like everyone else, we have a creamy curve that we go through. So how does technology, how does our efficiency offset that natural maturing of that portfolio. What I would tell you is when you look back in the last few years, '22, '23, '24, '25, you'll see a little bit higher average well productivity, a little bit lower. But inside those high and low watermarks is kind of a reasonable expectation of what we think our productive capacity is from our existing inventory as we fast forward out 3, 5 years kind of into the visible future. Now 5 years from now, we're going to be a whole lot smarter and we'll be a whole lot better and a lot more efficient. And I'll reserve judgment on years 6, 7 and 8 just yet. But I would say for the foreseeable future, we think we're in that productivity bandwidth, okay?

When you think about the capital efficiencies, you think about the technology evolution, I'm pretty optimistic on a growing free cash flow. We're in a ballpark of about $3 billion this year. I think that can continue to expand in the next coming years. Certainly, that is the line of sight, the focus that we have with this business optimization. That is the North Star. So you need to hold us accountable to growing. Now of course, that takes into account a presumption of a mid-cycle commodity price environment. I mean, oil price certainly is the biggest input on free cash flow.

We run about a $65 mid-cycle, and that's plus or minus about where we've been amazingly consistently, by the way, even with the call for too much oil -- OPEC oil coming online and all that. I think we haven't been too terribly surprised that gas hasn't run away. And I don't think we've been too terribly surprised that gas -- that oil hasn't fallen back. We're about a $350, $65 shop running for the next few years. And hopefully, as the oil production comes back online, continues to come in online. We'll have to watch China demand. We certainly watch all the macro signals, but we don't see a significant indication of things running away one way or another.

That makes sense. And then look, that's because the business looks really good in...

It works exceptionally well. Yes, we're generating -- I mean if you think of our 53- or 4-year history, I mean, generating $3 billion in free cash flow is an outstanding top 5 year in our 50-year history. And I think people look at the business today is like, oh, I just don't think things are going too well, like -- I don't know what planet you're living on. This is a hard business. And I've been in it long enough to know that these are the good years. We need to celebrate these years, and we need to propagate more and more years exactly like this, generating this amount of free cash flow, buying back shares, paying down debt, stockpiling cash onto the balance sheet, that's winning guys. That's exactly what we're trying to do.

So double-click on that last comment about use of that free cash flow. So you're halfway through the $2.5 billion debt reduction target, but that reduction is a big focus now. But by the time you get there, how do you think about cash return? And you mentioned just now stockpiling cash on the balance sheet, which also naturally leads to the question of why [stockpiling] cash. So what's the use of that cash?

Yes. So again, I'll start with our base dividend and continuing to grow that every year is kind of a hallmark that we really hope to remain kind of foreseeable future. So that's essentially a nonnegotiable as we start there. Above and beyond that, we've been buying back between $200 million and $300 million worth of our stock each quarter. As we get more free cash flow, certainly, half of the audience, I think you might be on this side of the equation, would like for us to lean in a little bit more on the share buybacks. And I can tell you that we'll continue to revisit that. But as a starting assumption, consider that $200 million to $300 million kind of the right relative frame.

What we will try to avoid doing, which I've seen our industry do and other industries do, especially in commodity businesses where say, for example, oil price runs, you get a lot of free cash flow. It's very tempting to buy back shares there exactly when you shouldn't buy back shares because that's when your shares are typically highest valued in the cycle. And then the contrary is true on the flip side. By having a little bit more of a methodical quarter-to-quarter basis, we feel like that helps take those dollars when you're traded a little bit lower and leverage them into more shares. And then on the countercyclical side, you're buying fewer shares when your prices are -- when your share price is higher on a per share basis. So that's kind of a rough generic view going forward.

Certainly, you mentioned the debt paydown, $2.5 billion. We're well on our way. I feel very confident about being able to knock down the $500 million that's coming callable. And then we have a $1 billion term loan, we'll be able to take those out. I feel very confident in being able to do that. I think above and beyond that, hey, let's get the wins on the scorecard. We'll post more wins in the quarter. When we have more credibility that we received associated with this $1 billion. And by the way, I don't expect us to be done in $1 billion.

I expect that momentum to carry us through. I think there will be more and more wins on the technology front that we'll be able to lever to the bottom line. And then we'll talk about what do we do with those proceeds. As far as the balance sheet and bringing dollars onto the balance sheet for now, I think the best way for us to pay down debt is in a net debt sense. And so starting with the callable debt, we'll be able to take that down. This term loan, we'll be able to take that down. Above and beyond that, we don't have a lot of callable debt. And so the most cost-effective way we can do that is just offset that with cash. There's a very little carrying cost associated with that debt. But certainly, as it becomes due, we'll be able to continue to chip down at that.

Great. That makes sense. Along the line with the -- talked a lot about upstream. Just how do you think about the value creation enabled by midstream and then the investment in the midstream business? Because you guys have been pretty early in doing the partnership with WaterBridge. Just what's your philosophy around that?

Yes, I think this goes deep into our DNA. I mean you've seen Devon over lots of years, do things in the midstream space, very confident in this space. This is a skill set that we have, and a lot of times, we can lever our upstream skills into more lucrative midstream deals. There's many, many, many examples of this. One of the most recent is the WaterBridge -- or excuse me, the Matterhorn deal. And so we held an upstream position that enabled us -- really required us to help underwrite that pipe. great team we worked with quite a bit. We made a 5x multiple on that investment. But more important to that, we had the governance and the position and the relationship with that team to make sure that, that pipe was built because the most important thing for us was getting that additional capacity of gas out of the Delaware Basin all the way to the Gulf Coast. And so we were able to accomplish that.

And then you saw us at the same time, we announced the sale of Matterhorn. Again, we capitalized on an investment, but most importantly, we accomplished our bigger goal, which is getting the pipe built, okay? The same time, you saw us announce something that seemed to move the opposite direction, where we bought out the second half of the interest of the Cotton Draw midstream. So this is a deal that we had in the works for several years. Our partnership there, we needed to build out some infrastructure. We didn't want to put it entirely on our capital burden. So we had a partner come along. We've taken that partner out now. We own that. And this -- again, this will be about $50 million to $90 million per year of avoiding cash out the door paying our partner. This is a very significant return on investment associated with this $260 million investment.

And by the way, very importantly, those are 2 examples of deals that we're not claiming credit on towards our business optimization. This again, you mentioned early, we didn't expect to get 100% credit associated with that on the day of announcement. More quarters come, the more earnings that we post towards this goal, we will get more and more credit in the market associated with that. But I think credibility associated with not claiming kind of easy victories, you mentioned the tax bill. That's about $300 million a year benefit to us. That is a $300 million benefit in free cash flow. We're not claiming credit on that. That's not part of our $1 billion optimization.

We're seeing a little bit of deflation. I'd characterize it as an overall deflationary market. Those savings, we're trying to parse out set aside. All 4 of those things are above and beyond our $1 billion target, and we're trying to be as consistent and credible on this $1 billion as we possibly can because I think the most important value creation opportunity for our Devon shareholders is increasing this credibility, increasing this view of this team's ability to create more and more value with these assets. And then I think that opens up many more doors down the lines on more interesting things to do.

Yes. No, that makes sense. And if we just click back on the water side of things, it's -- you recently signed an agreement to buy pore space. I guess, where do you see other opportunity when it comes to the midstream infrastructure? Do you see that as an area of investment for Devon or see that as an area of monetization down the road around the partnership?

Yes. I don't see this particular -- the deals that we're doing around water as significant business extensions of what we do. This is a little bit more business enablers. And so I think about working in the Delaware Basin, 2 of the most critical things that you need to be really good at is, one, getting electricity to location; and two, is getting water away from location. And those don't get any headlines and they don't get any excitement. But I can tell you, if you fail at either of those, you're not getting oil away from the asset either. And so they're fundamental enablers. And when I think about the work that we've done on both of those fronts over multiple years, I think we are well ahead of many of our peers, and I'm really proud of the work that we're doing.

Today, in state-of-the-art New Mexico, there are no more electricity coming -- there's no more electricity that we can source from the utilities. [indiscernible] said, look, we're tapped out. We can't build anymore, whole political thing, I'll have a beer with -- we'll share some, commenting on some of those issues. But self-induced issues in New Mexico. There is no more electricity available. And so what have we done? We've been very proactive over the last several years. We built over 800 miles of electrical distribution. We've got our own microgrids. In addition to generators on location, we're now looking at our own infrastructure. Step beyond that, we'll be looking and trying to understand our capabilities of building co-ops with peers to build our own -- essentially our own utilities. That's a whole political challenge and a whole another step. But that's kind of the future that we're having to explore in a defensive mechanism.

Water, as you mentioned, it's another absolute critical path item to make sure that we have the ability to do what we do. We produce just ourselves about 1.5 million barrels of water per day, okay? That is a tremendous amount -- every single day, tremendous amount of water. A lot of that goes from New Mexico to Texas, and we own a lot of that infrastructure. You go back to the WPX legacy all the way back to 2015, one of the enablers of us entering the basin was that RKI had put a lot of water infrastructure and wells and pipes in place. That enabled us to really be able to see the value creation opportunity. We have built so much more since then. And then as you mentioned, we've done JVs. WaterBridge is the latest one.

They had bought a bunch of open land, big 20,000-, 30,000-acre ranches that hadn't been drilled yet. And so this is virgin acreage that hasn't been -- the pore space hasn't been tapped. What was notable in one of our recent announcements is that we reserved actual pore space. It does not matter if you have pipe or even if you have wells. If that pore space is full, you're done. And so thinking really holistically about those potential gating issues and for Devon, really being proactive about making sure that we have the ability to continue to produce this incredible resource for decades to come.

That's great. Well, as a wrap-up, I was going to ask you what makes -- what parts of Devon are you most excited about? Everything we talked about, you're really excited about. So is the takeaway -- the free cash flow, the North Star, when you think about how you -- the one thing that you look at to look at the progression of the company, is this the free cash flow expansion?

Look, at the end of the day, we're here for shareholders. And so how do we create more value for shareholders? I think the key enabler is unlocking this credibility and this incremental value creation. And so I say credibility because we all think also in trading multiples. Right now, I think we're a bargain entry price. I think as we post more scores on the board in the coming quarters, we'll continue to unlock that potential. I think that's the investment thesis for Devon. Now what we do with that credibility is equally important. And so what you'll see us talking more and more about is more out on the horizon value creation opportunities, which is a whole another 30 minutes we'll have some other time.

Well, it's been a fun conversation, Clay. Thank you so much.

Appreciate it. Absolutely.

Welcome to Devon Energy's Second Quarter 2025 Conference Call. [Operator Instructions] This call is being recorded. I'd now like to turn the call over to Mrs. Rosy Zuklic, Vice President of Investor Relations. You may begin.

Good morning, and thank you for joining us on the call today. Last night, we issued Devon's second quarter earnings release and presentation materials. Throughout the call today, we will make references to these materials to support prepared remarks. The release and slides can be found in the Investors section of the Devon website.

Joining me on the call today are Clay Gaspar, President and Chief Executive Officer; Jeff Ritenour, Chief Financial Officer; John Raines, SVP, Asset Management; Tom Hellman, SVP, E&P Operation; and Trey Lowe, SVP Technology and Chief Technology Officer.

As a reminder, this conference call will include forward-looking statements as defined under U.S. securities laws. These statements involve risks and uncertainties that may cause actual results to differ materially from our forecast. Please refer to the cautionary language and risk factors provided in our SEC filings and earnings materials. With that, I'll turn the call over to Clay.

Thank you, Rosy. Good morning, everyone. Thank you for joining us today. Devon delivered another quarter of production outperformance, capital reduction and improved 2025 outlook driven by our unwavering commitment to operational excellence and financial discipline. Our strategic priorities on Slide 3 remain steadfast: operational excellence, advantaged asset portfolio, maintaining financial strength, delivering value to shareholders, and cultivating a culture to succeed.

Amid market volatility, our veteran leadership team is not distracted by the headline or tweet du jour. We keep our eyes focused on the larger macro signals, and we have guided our team's energy towards controlling the controllables. As you will hear, during the quarter, we avoided the distractions and have made significant progress towards our business optimization goals of making Devon a more efficient value creation machine. Our optimization plan will create an incremental $1 billion of annual free cash flow by the end of next year. While cost-cutting is part of the strategy, our focus is on driving value to the bottom line. Many of the wins are tied to production enhancements, inciting a culture of continuous improvement and a heavy dose of technology.

Only 4 months into this initiative, our team has already captured 40% of our target. As I sit here today, I'm highly confident in our ability to achieve our $1 billion target on time and, as a result, create significant and sustainable value for our shareholders. Consistent with our strategy to enhance our asset portfolio, we completed the sale of the Matterhorn pipeline in Q2. Then on August 1, we acquired the remaining noncontrolling interest in Cotton Draw Midstream. These transactions are value enhancing and strengthen our financial position to support future growth. By optimizing our midstream holding, these deals bolster our E&P operations and give us long-term value creation for our shareholders.

Let's turn to Slide 4 and discuss our quarterly highlights. The second quarter demonstrated the strength of our capital program and diversified portfolio. As I mentioned, our second quarter production exceeded the top end of our guidance. These results were driven by our franchise asset, the Delaware Basin, and strong performance across our other assets. Continued efficiency gains and effective supply chain management allowed us to outperform expectations with capital spending coming in 7% below guidance. The impressive performance on both capital and production generated significant Q2 free cash flow of $589 million and further strengthened our financial foundation. Approximately 70% of the free cash flow was returned to shareholders via dividends and share repurchases, underscoring our reinvestment strategy and commitment to delivering meaningful, long-term shareholder returns.

Let's take a closer look at some of our operational metrics. Slide 5 showcases the significant operational efficiencies we are achieving across our portfolio. In the Delaware, our teams have continued to push the envelope in both drilling and completions. By leveraging our existing -- or excuse me, our extensive data streams and our proprietary in frac and in-drill AI agents, we're able to capture operational enhancements in real time and drive efficiency in our critical operations. In parallel to these real-time operational assistants, we're also leveraging design improvements, simul frac implementation and relentless focus on safety and execution.

These enhancements have resulted in another 12% year-over-year improvement in drilling cost and a 15% improvement in completion costs. These are not just onetime gains. They reflect the ongoing commitment of our teams to drive meaningful long-term improvements in how we operate. We are seeing similar momentum in the Williston, where our innovative approach has delivered $1 million in savings per well since the Grayson Mill acquisition last year. We've reduced total well costs through design enhancements, improved drilling and completion practices and by leveraging technology.

Finally, in the Eagle Ford, I'm pleased to report that we've fully captured the $2.7 million in savings per well that we set out to achieve as part of the dissolution of the JV in April. Overall, the operational highlights demonstrate how our teams are continuously seeking new ways to drive efficiency and deliver value.

Let's turn to Slide 6. You can see how these operational improvements are driving real capital efficiency gains. Since November, we've reduced our 2025 capital guidance by 10% or $400 million. We've achieved these capital reductions while regularly increasing our next quarter production guide and maintaining a strong 2026 production outlook. This outcome is a direct result of disciplined capital allocation, ongoing operational improvements and importantly, our commitment to leveraging technology across the business.

Our proprietary AI tools, agents and models are embedded throughout our operations from drilling and completions to real-time production optimization. These technologies enable us to quickly source and analyze vast amounts of data, make informed decisions faster and continuously refine our workflows. As I mentioned before, we're not just cutting costs, we are optimizing well performance, reducing cycle times and streamlining field operations, all while delivering production performance and strengthening our financial position. These are sustainable structural gains that will translate into more efficient capital deployment, stronger free cash flow and long-term value. With that, I'll hand the call over to Jeff.

Thanks, Clay. Turning to Slide 7, where we highlight another quarter of strong financial performance for Devon. In the second quarter, we delivered core earnings of $0.84 per share, EBITDAX of $1.8 billion and operating cash flow of $1.5 billion. After funding our capital requirements, we generated $589 million in free cash flow. This was driven by production exceeding the top end of our guidance, reflecting the excellent operating performance highlighted by Clay, disciplined capital investment resulting in a 7% outperformance versus expectations and production costs improving 5% from the prior period due to reduced downtime, lower workover expenses and lower production taxes.

In addition to strong organic free cash flow, we closed the $372 million divestiture of our equity interest in the Matterhorn pipeline, resulting in $307 million pretax gain. With the associated taxes from this divestiture, our current tax rate was approximately 21% for the quarter, above our recent run rate. With this robust cash generation, we delivered significant value to shareholders, paying $156 million in dividends and allocating $249 million to share repurchases. We remain firmly committed to our capital allocation framework, balancing high-return investments with substantial cash returns to shareholders.

Moving to Slide 8. Our financial strength and liquidity position remain a clear differentiator for Devon. We exited the quarter with $4.8 billion in total liquidity, including $1.8 billion in cash on hand. Our net debt-to-EBITDAX ratio improved to 0.9x, reflecting our ongoing focus on maintaining the strong balance sheet. Our $2.5 billion debt reduction plan is progressing well with $500 million already retired. Additionally, we plan to accelerate the retirement of our $485 million senior notes maturing in December. Taking advantage of the no penalty call option, we've elected to retire these notes in September, 1 quarter earlier than originally planned, saving $7 million in interest expense in 2025.

Another differentiator for Devon is our success on the midstream and marketing front. After quarter end, we acquired all outstanding noncontrolling interest in Cotton Draw Midstream for $260 million. This transaction gives us 100% ownership of the asset and full access to its cash flows, resulting in savings of over $50 million in projected annual distributions that would have been paid to our partner. These savings are incremental to our $1 billion business optimization plan announced earlier in the year, further improving our multiyear cash inflows.

Full ownership of Cotton Draw Midstream strengthens our competitive position in the basin and supports future growth in one of our most prolific areas. Alongside the Matterhorn pipeline divestiture, this acquisition demonstrates our commitment to creating value and enhancing our E&P operations through our strategic midstream investments. With these transactions, we've successfully created value as both a buyer and seller of midstream assets. Moving forward, we remain open to additional opportunities in the midstream space and creating additional value with our investments.

On the gas marketing front, we're focused on maximizing realizations and positioning our gas production to benefit from increasing demand driven by LNG expansion and power generation. In the second quarter, we executed 2 new agreements that advance these objectives and further diversify our natural gas sales portfolio. The first is a 10-year gas sales agreement to an LNG counterparty starting in 2028, under which Devon will sell 50 million cubic feet a day of natural gas at a Gulf Coast delivery point with pricing indexed to international markets. As LNG build-out creates additional demand for natural gas, we expect to pursue more opportunities to add exposure to international price markers.

The second is a Permian gas sales agreement with Competitive Power Ventures Basin Ranch Energy Center to support its proposed 1,350-megawatt power plant. With an expected start in 2028, Devon will supply 65 million cubic feet per day of natural gas for a 7-year term with pricing indexed to ERCOT West power prices. This pricing construct further limits Devon's exposure to the Waha price weakness we've seen in the basin for some time.

Now turning to Slide 9 to touch on guidance. For the second consecutive quarter, we're raising our oil production outlook while lowering capital spending. We now expect full year oil volumes to range from 384,000 to 390,000 barrels per day, reflecting continued strong well productivity and base performance across our portfolio. Total capital guidance has been reduced by $100 million to a range of $3.6 billion to $3.8 billion. Importantly, our breakeven funding level remains highly competitive at less than $45 WTI, including the dividend. At today's strip pricing, this positions us to generate approximately $3 billion in free cash flow for the year, underscoring the resilience and flexibility of our business model.

I'd also like to highlight the positive impact of the recently passed federal legislation which provides meaningful tax benefits for Devon. These changes are expected to enhance our free cash flow profile in 2025 and beyond, further strengthening our ability to reinvest in the business and return capital to shareholders. While our tax rate will be somewhat volatile over the next few quarters as we incorporate the new legislation, we now expect our full year 2025 current tax rate to be about -- to be around 10%, down from our previous estimate of 15%, adding nearly $300 million in projected cash flow for the year.

Looking beyond 2025, we expect to no longer be subject to the corporate alternative minimum tax. As a result, we anticipate our ongoing current tax rate will be significantly lower than previous estimates, ranging between 5% and 10%. This reduction will provide Devon with increased cash flow of approximately $1 billion over the next 3 years, assuming a similar pricing environment and capital spend. This is in addition to the $1 billion of incremental free cash flow from our business optimization plan.

Looking ahead to the third quarter, we expect to build on the momentum established in the first half of the year. Our operational execution remains strong, and we anticipate stable production of 387,000 barrels of oil per day. With the capital efficiency improvements and as new wells come online and optimization initiatives take effect, we expect lower capital costs compared to the first 2 quarters. As our teams continue to deliver on key milestones, we're confident that Devon is well positioned to deliver another quarter of strong results and create additional value for our shareholders.

Shifting gears now to talk about the business optimization plan on Slide 10. On the right side of the slide, you'll see a scorecard tracking our progress. As we achieve milestones that generate additional cash flow, we'll update this graph to provide clear visibility into the timing and impact of these benefits. In the course of only 4 months, we've achieved 40% of our $1 billion goal. From the dark blue bars on the graph, you can see the progress we've made by category to date. This quarter, we're reducing 2025 capital by another $100 million, roughly $75 million of which is directly attributable to our business optimization efforts, with the remaining $25 million resulting from deflationary pressures.

As Clay mentioned, our drilling and completion teams are leveraging artificial intelligence to drive capital efficiency while our production teams continue to innovate lift techniques to sustain production levels. On the corporate cost front, we'll retire our $485 million senior notes this year, resulting in $30 million in annual savings to our run rate cost structure. As a reminder, $100 million of the $150 million target in corporate costs will be met with debt retirement. We expect to achieve this target in the third quarter of 2026 with the pay down of the term loan.

Finishing our business optimization discussion on Slide 11. As we've said before, our intent is to be open and transparent with this plan, communicating often. We've included more details here on initiatives underway and milestones achieved. With that, I'll now turn the call back over to Rosy for Q&A.

Thank you, Jeff. We'll now open the call to Q&A. Please limit yourself to 1 question and a follow-up. With that, operator, please, we'll take the first call.

Our first question comes from Neil Mehta with Goldman Sachs.

Appreciate all the color here today. Would just love your perspective on getting on the non-oil realizations. I think what's clear is you're executing very well on oil. The netbacks are good on oil. NGLs and local gas prices have continued to be a headwind for a lot of producers, including you guys. And so as you think about the back half of this year and into next year and then some -- even some of the marketing agreements that you announced here today, what are you doing to try to capture better on the non-oil side of the equation?

Neil, it's Clay. Thanks for the question and on the acknowledgment of the good work that our midstream and marketing teams are doing every day. We highlighted a couple of deals this quarter, but it's just -- it's on top of all the other good work that we've done. I'll let Jeff dig in a little bit more on those 2 particular deals, but I think it's a great opportunity just to us to continue to acknowledge the work that we've been doing in this space for quite some time now.

Yes, Neil, this is Jeff. Yes, I appreciate the question. And as you know well, we've talked about this for a number of quarters in a row now. Our broader marketing philosophy specific to our natural gas, and again, the bulk of our natural gas production obviously comes out of the Delaware Basin today, followed by our Oklahoma gas production. But specifically in the Delaware, our approach has been to move those molecules away from Waha, right? We talked about the weakness that we've seen in Waha for some time.

We've been involved with some of our midstream investments and our broader commitment to firm transportation to move molecules away from Waha and to the demand center, specifically to the Gulf Coast. So where we sit today when we look at our Waha exposure, less than 15% of our gas actually has direct Waha exposure in basin. The rest of that, we either hedge our exposure or our firm transportation and our firm sales to our counterparties, move those molecules away mostly to the Gulf Coast again.

As we look forward between Matterhorn and our Blackcomb commitment that we've made, the pipeline that will come on later -- late excuse me, in the second half of next year, we're going to be approaching over $1 billion of transport out of basin. So we feel really good about the -- excuse me, 1 billion -- 1 Bcf a day, sorry, a Bcf a day of transport out of basin, which makes us feel really good about the work the team has done, as Clay mentioned, to really limit our exposure to Waha on a go-forward basis.

On top of that, obviously, with the announcements that we mentioned today in our opening remarks, we're always happy to see incremental in-basin demand show up. And so the CPV power gen opportunity is something that we're excited about. Again, relatively small relative to our production profile in the Delaware, but every bit helps and particularly like the idea of the indexed to the power price, which we're bullish on and think that again provides some real diversity to our gas sales portfolio.

Yes. That's great color, guys. And then Slide 10, always helpful to see how you guys are scorecarding across the buckets of business optimization. Just unpack this for us a little bit. How is that 40% that you've achieved in the first 4 months compared relative to your expectations? And what's the next key milestone you guys are really focused on here?

Yes. Thanks for the question. This is Trey. We're really encouraged by all of the advances that we've seen so far. Obviously, we've made a ton of improvements across several of the categories. And we're going to continue to see a lot of the other categories. The ideas that are being implemented today show up in the financials in the coming quarters. We're -- some of the examples that I would share, we continue to see our teams lean on technology and AI. The way that all of our employees are working today is changing in real time. And we've seen the adoption and the investment that we've made over a number of years really take fire, and we -- our leadership team has set an expectation and table stakes really that we expect all of our employees to use these new tools, and that's showing up in a lot of these business optimization initiatives that we have across the company.

One that I would highlight is in our production space. And we've got a new analytics that we've just had a breakthrough in the last quarter of how we're tying all of our real-time streaming data from the field into our AI systems and into our agents and allowed us to come up with a new way of how we're analyzing our production faults across the company. This is going to result in millions of dollars of savings, and we've got many of those ideas that are being implemented today that we're going to continue to see grow legs and show up in the financials in the coming quarters.

And Neil, I wanted to pile on that. I want to reiterate something that Jeff mentioned in his prepared remarks. The credibility of this program is really, really important to us. When we announced it back in 4 months or so ago, we knew we weren't going to get an instantaneous credit of $1 billion of incremental free cash flow baked into our share price, that we needed to earn it. And so there's 4 things that I wanted to point out that we have specifically set aside as incremental to this business optimization, the $1 billion of annual free cash flow.

So last quarter, we talked about the proceeds from Matterhorn. We are not claiming credit for that in our business optimization model. This quarter, we talked about CVM and the benefits associated with $50 million-plus of dollars not going out the door that we are not claiming credit. In addition, we've talked before about the deflationary dollars. That will not accrue to this tally as well.

And then the really big 1 this quarter is the taxes. Obviously, $300-plus million a year will absolutely enhance our free cash flow, but we're not claiming credit on this business optimization for those 4 important things. So think of it this way, we're going to achieve $1 billion of incremental free cash flow by the end of next year in a sustainable, ratable way each year going forward plus these other very, very significant items.

And so I think the credibility is worth underscoring about 3 times just to make sure that you guys are hearing us. We're trying to be as transparent and open as we can on this and really holding ourselves accountable to achieving some really big things. And what I would tell you is that the team is crushing it. So thanks for the question.

Our next question comes from Scott Gruber with Citigroup.

It's nice to see the full year oil volumes ticking higher here. Does the improvement in the output drive you to shift higher how you think about the maintenance level of production in '26 to use the new run rate from this year?

Yes. Thanks for the question, Scott. Look, we -- obviously, next year is a little still too early to talk about. We're not providing guidance yet. But obviously, we're doing the work. The work that we do this year really sets up the work for next year. And what we're still doing is goal seeking for that kind of [ mid-3 80s ] as the right run rate going forward. So don't think of this as a reset. We're going to have some quarters that are a little hotter and a little bit lower but we're still running kind of that [ mid-3 80s ] as the right oil rate for us. So this is not a reset going forward.

Well, I guess with the production enhancement efforts, would that not tick higher? Kind of why keep it at the mid-3 80s? Or is that just kind of baking in some conservatism?

Yes. So we're -- obviously, we're thinking a lot about the macro. We feel like the oil market is just generally well supplied. And what that translates into us is that we think maintenance capital is the right approach from an investment standpoint. So as we accrue benefits on the production side, on the capital side, on the LOE side, what we're attempting to do is accrue those benefits on the cost side of the equation ultimately in a reduced capital benefit.

Now it's hard to do that on a quarter-to-quarter basis. And so you see like we've guided next quarter to a midpoint of [ 3 87 ] Don't think of that as a runaway growth. This is just the incredibly good work of the teams. What we're trying to do is make sure that we balance kind of moderating that activity so we're not running away on production. But at the same time, we're being very thoughtful about trying to be ratable and smooth in that outlook, and that's what we're solving for when we're looking at '26 and really beyond. Yes. John's got 1 other point.

Yes. And I think just to add to Clay's comments, the downshift in rig and horsepower count that you saw us announce in Q1 is reflective of that. So as we have these production optimization gains, a lot of times, they show up in a lot of small ways and we see it more in real time. And to Clay's point, we see that in the next quarter. And so that's the reason you're seeing a little bit higher guide for the next quarter. But the behavior that Clay described really manifests in Q1 and Q2. And you're seeing those rig drops here in the second half of the year, and that's reflective of what I think you'll see us do go forward when we have these production wins.

And think about the benefits of that, Scott. I mean, we are all just cherishing this amazing portfolio that we have. And each time we're able to kind of moderate that activity, flatten that base decline, lower that -- the amount of maintenance capital that's required, that extends that runway even further. So there's many magnitudes of benefit associated with the good work that we're doing on this business optimization.

Our next question comes from John Freeman with Raymond James.

This morning, Landbridge announced a produced water space agreement with you all starting in 2Q '27. It looks like you are getting out ahead of what could potentially be an issue in the Permian. I'm just hoping you all could maybe elaborate on that deal and how much runway you see it providing you all.

Yes, John, you're exactly right on us getting out ahead of it. I would just tell you this deal is very consistent with our water management strategy in the Delaware Basin. And maybe I'll hit that at a high level. So first, it's probably worth noting just the magnitude of the water production we have in the Delaware Basin. We're managing, at any given time, anywhere from 1 million to 1.2 million, 1.3 million barrels a day.

And so the first call on that water really for us is our water recycle and reuse. Depending on how many frac crews we have running at any given time, how much third-party water demand may be out there, we can send maybe 25% to 35%, maybe on a really good day, 40% of our water back to recycle and we'll reuse that in our operations. But beyond that, we've got to manage that water. And we've done a couple of things over the past few years to be really proactive in that space. One was our joint venture with WaterBridge predominantly on the Texas side of the basin. We've since expanded that partnership a bit on the New Mexico side.

The other thing that we've done and more predominantly on the New Mexico side is continue to build out our infrastructure into what we call a super system. And specific to New Mexico, we now have the ability to move water from asset to asset bidirectionally. It gives us a lot of flexibility. And then what we do on the back end of that is we have a lot of strategic partnerships with third parties to be able to move that water around. And so the deal that you saw announced this morning is simply one of those strategic relationships with a third party. We've really leveraged our WaterBridge JV to be -- to allow us to do that.

And so in 2027, when that deal really becomes effective, we'll now have the ability to move that water to a part of the basin that's much lower in terms of poor pressures in the Delaware Mountain Group. And so I see this as a strategic advantage for Devon going forward. It's a win-win for our partners on the deal and for Devon.

I appreciate the color. And then just following up on the new gas marketing agreement with CPV. You've got a competitor that's also participating, and they disclosed the right to also purchase power from that facility for their own operations. Do you all have a similar agreement in place?

Yes, John, I appreciate the question. We have not negotiated an agreement to purchase power from them at this point in time, but that's absolutely something that our option, frankly, and John can speak to this in more detail. We just don't have the load on the Texas side of the border and the need for it at this point in time as maybe compared to what we're doing on the New Mexico side. John, you want to add some color to that?

Yes, I think that's right. I don't have a lot of color to add there. But over on the Texas side, we haven't fully electrified a number of our facilities, and that includes some of our midstream compression, which would really cause our load demand to be significantly higher. To that, we also have dedicated substations on the Texas side, good partnership and relationship with Encore. So on a relative need basis, that's not simply something that we have as much of.

Our next question comes from Paul Cheng with Scotiabank.

Maybe if we -- can we look at Bakken? Maybe the data is wrong, but it does look like the well productivities has maybe come down a bit and also from the third-party data. So can you give us some idea that, are we seeing that is just a dip or that the deterioration is something that need to work on? And also whether you have a sufficient scale now after the Grayson acquisition that you think you have?

And the second question is that on Eagle Ford, that after the dissolve of the joint venture, can you give us some idea that now you reset -- I suppose that you reset the base? And how is the cadence on your activity and also your production outlook for that over the next several quarters?

Yes, Paul, this is John. I'll do my best to answer both those questions. So starting in the Williston, really the phenomenon you're seeing there is back in what would be probably some of the newer public data you're seeing coming from Q4, that was largely our Missouri River pad on the east side of the basin, which is our legacy asset.

Simply put, the geology is higher quality there. You're going to see more productive wells. So as we've shifted our activity over to the west side of the basin on the newly acquired Grayson asset, on a relative basis, you're going to see well productivity be a bit lower. What I would tell you, though, relative to our expectations, our well productivity has been quite good on the west side of the basin. So very consistent with our expectations and really no concerns on our part with Williston well productivity.

I think second on your question on the Eagle Ford, if I heard you correctly, yes, there's absolutely been sort of a reset on our production there. As we closed the BPX dissolution on the first day of the quarter, BPX took a disproportionate amount of the production on that deal while we took more of the upside. And so really, when you look post-BPX dissolution closure, we've got about 55 more wells that we want to bring on throughout the course of the year on that asset. That's about 90% in DeWitt County on the Blackhawk field formerly part of that JV, and we feel really good about our ability to continue to grow production back to the levels sort of pre split.

Our next question comes from Scott Hanold with RBC.

Jeff, you kind of mentioned the windfall you all are going to get from the OBBA. So trying to think you said $1 billion over the next few years. What is the plan on allocating that cash? Like what are you targeting to do with that? Could that be for incremental shareholder returns? Do you -- would you rather focus on maybe paying off the term loan faster? But just give me your thoughts on how to allocate that.

Yes, Scott, it's a great question. And I appreciate you highlighting the optionality that we're going to have with the incremental free cash flow. Really, really a great position to be in on a go-forward basis. When we look at our financial framework and shareholder return kind of approach, there's, as of today, no change to that going forward. So as you know, the priority there is for us to grow and sustain our fixed dividend as kind of the first priority. We've set out a range on the share repo by quarter of about $200 million to $300 million per quarter. We don't expect to change that at all.

And then, of course, as you know, we've got the $2.5 billion debt reduction target out in front of us as well. So as we accrue this incremental free cash flow from our business optimization game plan, from the tax savings that we've seen or expect to see, that will accrue to our balance sheet and will likely accelerate some of the debt reduction that we have planned here over the course of the next 18 months or so.

Okay, I appreciate that. My follow-up is on the Anadarko. And Paul highlighted, obviously, there are some moving parts on both Bakken and Eagle Ford production. But I think Anadarko stepped up pretty strongly this quarter as well. Can you tell us where you all are with the JV there and how to think about that production? And obviously, it's got a little bit more of a gas mix. So it'd be interesting to hear your kind of thoughts on investing in that area and your views on the gas macro.

Yes. As far as the Anadarko, a lot of what we're doing there is really prosecuting our Dow JV. So as you recall, it's a 49-well commitment we kicked off, I believe, here in the second quarter. And so we've been prosecuting that activity with that. The production growth that you've seen sort of quarter-over-quarter there would have largely been tied to the new well IDs associated with that activity.

Now we'll say relative to Q1, we did have some weather impacts in Q1. So the growth probably appears to be a little bit more than what it otherwise would be. But we've been consistently running rigs in that basin now for much of the year. I'd say the activity is pretty consistent.

Our next question comes from Doug Leggate with Wolfe Research.

Clay, can you hear me okay?

Thank you, Doug. I can hear you fantastically.

Okay, great. I just wanted to check that there were no connection issues this time around, so thanks for your patience.

I sincerely appreciate you checking.

Good stuff. You've no idea how many times I said that last time around. But anyway, I did actually want to ask a question last call, and I didn't get to for some reason, and it was about the BP separation. And I want to address 1 specific issue. When BP talks about this, they said that they chose their acreage because they had problems with the Wilcox, the stability of the Wilcox sand in the eastern part of the play, which caused side tracks, all sorts of operating problems and so on, and they wanted to avoid that going forward. I wonder if you could address that as it relates to your experience of operating in that part of the Eagle Ford. And I've got a follow-up for Jeff if that's okay.

Sure, Doug. Happy to address that. So I mean, this is a classic win-win. I think BPX was really happy to get the acreage that they did and satisfied some of the objectives that they had. As John mentioned, they've got a disproportionate share of the production day 1. But I can tell you, we were equally happy to get the acreage that we did. We have more running room, more upside. We've seen this very material savings in capital cost that completely changes the game. We feel very confident in our ability to execute as you move to that Northeast area.

It is more challenging drilling but we are much more confident to having our D&C team jump all over that. We see a lot of runway. We've executed that. We didn't have the slide this quarter. But if you look back at last quarter, we showed that as we continue to move and take over, these material savings are real. As we continue to move to the Northeast, there's an extra step that we will take in regards to casing string. But what it does is at this lower cost structure, it continues to open up significant runway, and we just see so much more upside. So it's one of the things that we are super excited about.

The team has done an exceptional job on executing on some of the objectives that we had. As I mentioned in my prepared remarks, our stated goal was north of $2 million. We had kind of whispered we really think it's $2.7 million. We've now achieved that $2.7 million per well. And as you know, that changes the game on the upside potential of that runway and even the more challenging acreage to the Northeast. We just have so much more running room and so much more upside value to create from there.

Clay, that saving includes the additional string?

Yes. So the wells that we're comparing apples-to-apples, that's the $2.7 million. But we needed to be able to achieve that as we move to the Northeast. Most of those wells are going to be the same casing design, but where we apply the incremental casing designs, they were cost prohibitive before and so just had no value in our portfolio. With this improved savings, even if we have to add an extra casing string, which would require some extra costs, these remain value creative and accrued to the positive on NPV for us. So that incremental casing string, where necessary, is incremental, but know that, that overall savings still allows these wells to be competitive in our portfolio.

That's great. So my follow-up, Jeff, I guess there's a couple of pieces to this and it starts with cash tax. You've given the next 3 years. My question is, I know it's not -- there's no precision here, but this idea that you now get IBCs on a kind of, I guess, as long as the current administration is in place for an extended period of time, what does it look like beyond the next 2 or 3 years? And I guess my part B would be, clearly, this is kind of a windfall. I think I heard you say that you're prepared to put cash on the balance sheet and reduce net debt. Am I overthinking that?

No, that's exactly right, Doug. Yes, as we continue to -- and obviously, the tax is impactful, but also the free cash flow we're going to generate with our business optimization game plan and some of the other things that we've talked about here today that Clay mentioned previously, again, things can change in the world. But based on our current forecast, we're going to be generating significant free cash flow going forward, incremental to what we would have thought of even just a few months ago.

And so our game plan is not to change our shareholder return framework at this point in time, accrue that cash to the balance sheet, help us achieve that $2.5 billion debt reduction that we set out on the back of the Grayson Mill acquisition. So that's absolutely our current thoughts around how we're going to allocate this capital going forward. And again, as we work through our capital budget here over the coming months, we'll obviously provide some incremental guidance on 2026 and things may change a bit. But the current thought process is continue to work towards that $2.5 billion debt reduction beyond the cash return to shareholders.

To your question about longer-term kind of tax profile, as I highlighted in my opening remarks, the benefit of TMT going away from -- the corporate tax going away for us as a result of the IDC deductions, we'll have a tax rate, a current tax rate closer to that 5% level as we look at 2026. It will move a little higher in 2027, probably closer to that 10% that I highlighted in the comments. And then beyond then, again, assuming kind of current price structure, current capital investment, you'll likely see that current tax rate trend higher. But as we look out in our projections, if we look at the current tax rate we had here in the second quarter was obviously elevated with the huge gain that we had on the Matterhorn sale.

But if you go back another quarter and see us being in kind of the high teens, we don't get back to that kind of level in our projections until 6, 7 years out, right, under the current construct. So definitely a benefit for us. Obviously, the bulk of that comes here over the next 3 years with the acceleration of the R&D expensing and the bonus depreciation but really carries forward even beyond the next 3 years until things level out.

Our next question comes from Arun Jayaram with JPMorgan.

I wanted to follow up, Jeff, on the commercial opportunities or the $200 million that you've realized in that bucket. What is the timing of when you'll get those savings? Is that early in the year? But maybe just helpful because it is a pretty meaningful needle mover to get the timing there.

Yes. So Arun, remember, on the -- I think we talked about this on the last call, we've basically got the contracts executed in place to capture the bulk of that, right, which we've highlighted on our slide in our scorecard. Going forward, there's some incremental to go get, and we'll continue to work that forward over the course of the remainder of this year and into '26 a little bit as well. But that first tranche that we've already highlighted is kind of captured. Those go into effect at the end of this year. I think it's in the November, December time frame. So you'll really get the full year benefit of that as you look at our 2026 projection.

Got it, got it. I just want to make sure because on the slide, it says it's not captured in your 2025 outlook, but you'll get that later this year.

Yes. And the reason for that is it's not impacting 2025 so it's really a 2026 benefit.

Got it, got it. I got 1 follow-up. Clay, as you have contemplated a higher degree of co-development between the Wolfcamp B and Wolfcamp A zones in the Delaware Basin, I think the mix is going to 30% this year versus 10% last year. I was wondering if you could comment on how you're seeing the interplay between the Wolfcamp B and Wolfcamp A zones and just talk about, are you seeing any impacts to productivity in that Wolfcamp A zone?

Thanks for the question. When we think about these kind of -- these decisions, these are very macro portfolio-oriented. And so when we're doing the trade-off, we're thinking about rate of return, we're thinking about NPV, and we're thinking about quantification of the portfolio and we're trying to balance and optimize all 3 of those. I'm going to kick it to John. He can talk a little bit more in detail about what we're seeing kind of well to well, and then importantly, how do we plan to continue on this path rolling forward.

Yes, Arun and Clay, thanks for the setup there because I do think it starts with the trade-offs. As Clay mentioned, as we shift more into this multizone co-development, we know we're taking a little bit of a near-term trade-off on a bit lower well productivity in exchange for a more optimized net present value across our inventory, but importantly, a more sustainable and longer-term inventory runway.

And so when you asked the question specifically, is the inclusion of the Wolfcamp B impacting the Wolfcamp A.? I would tell you, generally, no, that's not what we're seeing. We've appraised that potential impact now over a couple of years. We've really optimized both our landings and our spacings to get these large multi-zone developments right. And I'd tell you that the benefit we see is really avoiding the depletion effect on future inventory. And so if we wanted to prop up our well productivity and just mow down our best zones, we could do that. And what we'd probably do is mow down our Wolfcamp A.

But if we did that, we would be sacrificing the productivity of the Wolfcamp B later on. You'd see depletion effects in those wells. And those wells would be lower productivity out in time. So this is a good reason of why we're so convicted in this multizone co-development philosophy. So limited to no impacts on the A, but the real win there is we're maintaining the productivity of the B wells. I hope that answers your question.

Our next question comes from Betty Jiang with Barclays.

It's great to see the operational momentum translating into free cash flow generation. A follow-up to you, Jeff. We talked a lot about the balance of capital allocation. Maybe asked differently, you are grinding out or paying down that $2.5 billion of net debt reduction faster than previously expected with all these efficiency gains, lower CapEx and tax savings. What do you think is the optimal debt level for this business going forward? We see you potentially reaching that $2.5 billion target by end of '26, maybe early '27. Is that after that, we could see a potential increase in cash return?

Yes, absolutely, Betty. I think that's a great way to think about it. As you and I have talked about in the past, the $2.5 billion debt reduction that we have targeted really does get us to kind of what I think about as our optimal absolute debt level. So if you see, obviously, today, we sit at $8.9 billion of absolute debt. You take off the $2.5 billion and you're somewhere in the $6 billion to $6.5 billion range. When we run our downside sensitivities around pricing and cost structure, obviously, that net debt-to-EBITDA ratio can flip on you pretty quickly.

But at that absolute debt level of $6 billion, $6.5 billion, we feel pretty comfortable and feel really good about maintaining our investment-grade status, which is critical to us for all parts of our business. So I think about that as kind of the optimal absolute level. And again, I want to reiterate, that's certainly a priority for us, but the benefit of, again, accruing this cash to the balance sheet, and we'll absolutely consider some acceleration of the debt repayment, as I talked about earlier.

But that cash on the balance sheet provides us optimal flexibility. So without question, we're going to continue to be talking to our Board about how do we continue to build upon the cash returns to our shareholders. And so don't take any of my comments as precluding the option down the road of that increasing over time. But certainly, in the near term, the priority is on the debt repayment.

That's very clear. My follow-up is on unlocking the next layer of resources. Given the lower cost structure, whether that's coming from midstream or upstream, do you see other resource opportunities that's getting unlocked now that was previously uneconomical under the prior higher cost structure? If so, like where it could be some of these opportunities?

Yes. Betty, I think the best example that I would point you to there, and we've talked about this on previous calls, is our objectives, for instance, in the Powder River Basin. When you look at what we're doing there and what we're trying to accomplish there, I'd say there's really 2 deliverables. One, we want to deliver more consistent and competitive well results. So when you look back to 2024 and what we've done in 2025, we've delivered very consistent results, in fact, some of the more consistent results in our portfolio. These are some of the best results we've delivered to Niobrara thus far.

The second aspect of our strategic objective there is we've got to consistently lower our well cost. And so when you look specifically at some of these optimizations and the work we're doing, we've been historically north of $13 million on a 3-mile Niobrara well. We've made a lot of progress. We've gotten closer to, call it, a $12 million type well. And when you look forward at some of the upcoming programs, some of the design changes we're making, some of the scale benefits we'll achieve, we have a vision well concept out there that aligns very well with our business optimization to get to a $10 million type of D&C cost for a 3-mile Niobrara well. And that's a perfect example of taking something that's marginally competitive in our portfolio today and making it competitive.

Our next question comes from Phillip Jungwirth with BMO.

You mentioned being open to additional investments in the midstream space. And I was just hoping you could expand on this and maybe what part of the value chain that could be. And what's the target level of investment be, assuming you're planning to -- you plan to fund this with Devon's balance sheet?

Yes. Thanks for the question, Phillip. I think what's really interesting about this quarter is you see an example of us highlighting a midstream asset sale and a midstream asset acquisition and both we're really excited about. We think they are cost beneficial, structurally beneficial, value-creating opportunities. And so don't think of us as maybe only going 1 direction on this but always trying to do the work to find out what is the better scenario to make us a better company.

In the case of Matterhorn, we had a tremendous [ 5-bagger ] return on that investment. We've held on to the capacity. And then importantly, we made -- we allowed the pipe to get put into the ground, which was the initial motivation. So check, check, check on that. We retain the capacity. We're doing a really good job there. When we think about something like CDM, that is one of our highest growth, highest value assets.

Maintaining control of that, we continue to see gas volumes grow in the area. We see significant upside for that. And then we had an opportunity to take out the rest of it and then lower our cost structure going forward at a very, very competitive investment. So both of those, although they could appear moving in the opposite direction, the common theme is value creation. Jeff, do you have other comments?

Yes, I would just -- I would echo your comment and just kind of just sum that up, say, everything that we do related to our midstream investments is specific to our broader strategy, both on the E&P side of optimizing our business there and creating as lowest cost structure as possible for our core business. And then on the midstream side, as Clay referenced this, it's really a thought process around our broader marketing portfolio and making sure that we can achieve the highest realized price for our molecules in all of our basins.

So as Clay gave a great example with Matterhorn, we made an investment there. And as he said, we're ecstatic with the significant gain that we achieved there. But the real driver of that investment was to make sure that pipe got built and make sure we could get our molecules via firm transport to the demand center. So that's really the broader strategic philosophy, if you will, of all things midstream investment for us.

Okay, great. And then you had strong Delaware production in the quarter and just following up on the co-development question. Now that we're halfway through the year, can you talk about just generally how performance has been versus expectations? Any key learnings so far? And then how optimized do you think you are at the moment as far as overall completion intensity per DSU?

Yes, I'll start with well productivity. So as you heard me mention earlier, we've developed more momentum into our multi-zone development philosophy. I think we've been talking about that for a number of quarters. When you look at the well productivity from the wells that we brought online this year, I think the public data set right now is Q1. And so what I would tell you generally is those well results are very consistent with our expectations.

I've also seen some newsletters, some data points, some chatter out there that well productivity is dropping off in a big way. So I do want to provide -- I would caution folks against calling that a trend, and I want to provide a little bit of context around our Q1 data set. So specifically, if you look at it, it's very weighted to the Wolfcamp B or the deeper Wolfcamp as well as disproportionately weighted to the Avalon.

When you look at sort of our total well mix this year for the Delaware Basin, we anticipate 30% to be Wolfcamp B, yet we brought on 60% of our total Wolfcamp B wells here in the first quarter. So what we would really anticipate is returning a bit to a non-outlier, more normalized well mix throughout the next few quarters. With that, we're going to see well productivity increase. So we feel very good about what we're seeing there.

I think your second question was around optimized on completions. This is something that we're always looking at. We're always adopting different completion designs based on what we're seeing with our own appraisal or benchmarking against competitors. There are some completion design changes we're making in certain parts of our areas and other parts we feel that we're dialed in. For instance, we were talking to the team just earlier this week about our completion design intensity in one of our zones and one of our assets, and we're going to dial that up based on what we're seeing.

So we continue to optimize around completions as well as all aspects of our development planning, which would include landings and spacings and other design parameters.

Our next question comes from David Deckelbaum with TD Securities.

Clay, I wanted to just get back to the initiatives, particularly on commercial opportunities. So far, it looks like the savings achieved have been in the Delaware. Do you anticipate focusing on other areas of the portfolio that might enhance some of the economics, specifically in areas like Anadarko? Or is there more work to be done more in the Delaware from the midstream renegotiation perspective?

Yes, David, for sure, the big wins have been in the Delaware, where most of our activity is. There's an opportunity for active renegotiation there. But we have made wins in Anadarko as well. We continue to focus there. We see the tremendous gas potential that we just need to unlock more value, make sure we're hanging on to the dollars that come in the door a little bit better. And so I'd say that's another area that we will continue to see accrued benefits.

And I guess, are most of the quantified opportunities that have been captured, are they more a function of better realizations or are you getting materially better rates here?

Yes, David, it's a mix of both. So given the nature of the contracts, depending on where it is and how the contract is constructed, sometimes you'll see that run through our realizations on gas and NGLs, in particular, in the Delaware. But at other times, it will run through GPT. So it can be a little difficult to follow in the financials from time to time. But absolutely, it's a mix of all the above.

Those are all the questions we have time for today. And so I'll hand the call back over to Rosy for closing remarks.

Thank you, Emily. And I want to thank everyone for your interest in Devon and your participation in our call today. If you have further questions or for those of you who did not get through on the call today, please reach out to Chris or myself. Have a good day.

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

Yes, we're going to keep things moving. Thanks again for joining us for this year's conference. Delighted to have our next presenter, Devon Energy's President and CEO, Clay Gaspar, joining us today. As many of you know, Devon is a really important company in the Oklahoma City community, in the broader Oklahoma City area. So I'm sure, Clay, you're pretty excited about a win for your hometown.

What are you talking about exactly, Arun?

The Thunder.

I had noticed -- Oh, The Thunder. Thunder, you say.

You may have an interesting Shai data point you could provide, but I'll leave that to you. But anyway, again, thanks for joining us today at this year's conference. We hosted a fireside chat series recently, and I can't tell you the number of investors that joined that event. And I think that Devon had one of the more interesting updates in 1Q on a really interesting business optimization plan that Clay and his team are leading, and we'll talk a little bit more about that.

Clay, before talking more about the micro, I was wondering if you could talk a little bit about kind of the macro picture, maybe start with a few introductory comments.

Yes. So thanks for that, Arun. First of all, I want to start. I think our team is really strong. And I think the good news is Shai is about to re-sign. Are you talking about The Thunder or you talking about -- which macro. No, all kidding aside, it's exciting. I mean in a place like New York, the Knicks could win the whole thing, and it's maybe the 75th most important thing going on in the city at one time. In Oklahoma City, I mean, that's really a big deal. And I love it for the community. I love it for the state. We were at Game 7, my family was there, and you just walk -- the governor walks up to you and hugs. In fact, you saw my son first. Hugged my son, he was like, this is awesome. And my son is like, awesome gov. We've got to dap it up. And he's just -- so anyway, it's a little different vibe in the world of Oklahoma in kind of the context, but we can't help but get excited about being good community partners. We were founding partners for 17 years, and to finally win the championship, it's really fun. So I'm a little jazzed, my voice is still a little bit hoarse, but anyway, it's exciting.

Flipping over to the other macro, the macro, macro, there's so much, I would call it, dynamic, maybe the most positive spend I can think of what's going on in the world today. I think it's really important in this business to make sure that you start whatever the complexity du jour is with a strong foundation, and that starts with a strong balance sheet. We've maintained a strong balance sheet. We continue to work towards chipping away at that, paying down debt. We hover about one turn right now. We'll continue to work on the $2.5 billion paydown target that we have. The good news is we're generating very significant free cash flow, roughly about $2.5 billion this year. First call on that is our fixed dividend. Second is continue to chip away at this balance sheet, which we feel really good about the process that we're going through on that.

And then look, there's an opportunity for us to continue to buy back shares, and we're taking advantage of that as well. So that's kind of the foundational piece. When you think about the near term, the headline du jour, oil price du jour, it can really be almost like a head fake. It's changing by the minute. And I think for me as a leader of the organization to try and respond to the news of the day is completely futile. And so trying to keep an eye on the horizon, look through the current fog, make sure that the fundamentals are there, starting with the balance sheet, compounding with a really strong portfolio. And then most importantly, a team that's in a winning posture. And so thinking about how do we excite the organization around continuing to raise the bar. And that's what we've done with the business optimization project that we announced a couple of months ago now.

The focus is free cash flow and the sustainability of that free cash flow. So we've got our eyes set on $1 billion of incremental free cash flow for the organization, again, on top of the incredible runway of free cash flow we have today. And I think it's fundamentally important. I think the absolute number itself is incredibly impressive. We're going to accomplish this by the end of next year. That time frame is incredibly important. But I think some of the hidden benefits that come from this are equally important. The culture of winning, the culture of benchmarking, always looking back, raising the bar, making it not just comfortable, almost expected and mandated that we ask ourselves constantly, how do we do it better. That is, to me, the hidden byproducts of this business optimization project that we're so excited about today.

In the meantime, we'll continue to watch the macro, try and answer the questions 2 months ago, hey, you're going to rig -- oil prices down before that oil price was up, how are you going to respond to this? Oil prices back down relative to the last week, how are you going to respond? And my answer remains steadfast. We're looking through the front month curve. Honestly, the incremental capital decisions that we make today have 0 impact to that front month. We're out looking 18 months ahead. And when you start looking at kind of the back end of the curve on these commodities, it remains relatively steady. And so that helps us not take the current head fake of $75 or $55 or whatever it is of the day and look past some of those things.

Clay, one of the industry talking points in 1Q was this notion that we may have reached a peak shale output on the oil side in the U.S., just given inventory exhaustion, declining well productivity and just broader industry decline rates. Firstly, do you think that we've hit peak shale in the U.S.? And what do you think the bigger picture implications are for the global macro for oil and Devon in particular?

Yes. That was one of our peers, Diamondback that called for that. And I respect the heck out of that organization, that leadership team. I'd say, in my view, that's probably called a little bit early. I think we continue to grow even in this environment. The momentum, the quality of the assets -- and again, I'll go back to the most important thing is the quality of the teams, and this is speaking above and beyond just Devon. The innovation that we've been able to apply to this incredibly opportunistic resource, thinking about long laterals, these creative well designs, just getting better at applying technology and eking out a little bit more of the resource that we have underfoot today. I'm not betting the under on our industry's ability just to continue to get better and have that accrete into continued growth.

Now when I think about Devon, I'm often asked, how do you think about growing versus shrinking versus capital maintenance. We're essentially in a capital maintenance program, about 385,000 barrels of oil per day, where we're really focused on and trying to maintain that, keep that pretty level loaded. And what that means is in this business optimization, as we accrue more efficiencies, we're going to accrue that on the capital side of the equation rather than the production side of the equation. Let me explain. Last couple of years, as we've gotten more efficient, that's done 2 things. One, it's brought in more production per capital, that capital efficiency, but there's an accordion effect that drags first quarter capital investments into fourth quarter of current year. And what that can do is put a little bit of capital pressure on the system.

In the prior years, we've absorbed that capital, and we've accrued the benefit to the production. So we've outrun production, beat and raised constantly over the last several quarters. What the new change in messaging is for this year is as we continue to accrue operational benefits, those first quarter dollars getting pulled into fourth quarter as it happens when you move more efficiently, what we're saying is we want to hold the line on capital -- excuse me, yes, hold the line on production, and then let the benefits accrue on the capital side. So last quarter, we announced a reduction of that $3.9 billion target to $3.8 billion for the midpoint. I expect that to continue to move in a positive direction as we get better and better and again, allow those efficiencies to make us a little bit more capitally efficient through the capital side of the equation rather than the production side of the equation. By the way, that's a little harder to do, easy in the spreadsheet, a little harder to manifest in the field.

Yes. Clay, post 1Q, just given some of the tariff impacts and some of the global macro uncertainty, a number of your peers decided to cut activity or moderate activity. Devon made the decision to stick with its activity plans. You did talk about cutting about $100 million of capital. Why was that the right decision for Devon? And we do note that commodity prices have improved since that time period?

Yes, improved and then fallen back again since you've written that note. Yes. And again, I'll go back to, boy, it is so easy to get spun up on the day's headlines. And I think the real much more important and much more beneficial view is to look through the current fog of that front month, not get too spun up. I mean we were just at $78 oil and just before that, $58 oil and trying to react to that is absolutely futile, and it just makes no sense. And it hurts you on several fronts. So number one is confusing the organization about what's the North Star, what are we focused on? What are we driving for? For us, sustainable free cash flow, durable sustainable free cash flow is what we're driving towards. We are clear on that.

Number two is you think about operational efficiencies. I have some of my operational partners in Liberty and H&P in the audience. I think about N9 Energy as well. So when I think about the confusion of, guys, we're dropping activity, we're dropping rigs. Oh, I'm sorry, before we drop, let's add that back up. Now we've got new crews. We've got the volatility that it causes our service company partners. And that's where inefficiency, safety issues, environmental issues really come to root. So our ability to be consistent, and again, eye on the horizon and longsighted on this helps us on every part of that value equation.

What about natural gas? Devon also has a significant supply base of natural gas. Can you talk about some of your assets that could be -- that are leveraged to natural gas? And how does the company take -- look to take advantage of what looks to be a pretty robust macro setting through the end of the decade for nat gas?

Yes. Let me go back. I forgot to mention one thing on that last question, Arun. So we have been running maintenance capital, I talked about just a few minutes ago, was a flat 385 on the oil side. We are basically flat, maybe just a touch of growth with that cadence in mind. And I've articulated, we're not looking to grow that incrementally. We're looking to save on the capital to be able to continue that maintenance. Some of our other peers were actually growing in this market. And so when they've actually reduced activity, I think they are reducing to the point of maintenance capital and essentially that flat production over the years. In my mind, that's where we already were. So some of our peers are kind of catching up to the position that we're at. So think about that one and store that one away as the moves that they've made have actually moved towards where we're at today. How are you Sherif, good to see brother.

So back to your gas question, we have great -- I really believe in diversity of our assets from a geographic standpoint, but also from a commodity standpoint. And so when we think about 50% rough numbers, oil, 25% gas, 25% NGLs, I think all 3 of those will have their day in the sun and our ability to move capital around to mimic the needs of the market, I think, is a net benefit to us. Now as we've tested the volatility of oil price and gas price and that relative response, over the last few years, it's constantly pointed us back to the oil molecule is going to dictate the economics, and that's going to really drive our decision-making.

Now as you march through our inventory over the next few years, we're drilling about 450 wells every single year. You get back into a situation where gas relative to oil, maybe you get back to this kind of 10:1 of an $8.80 environment, maybe that changes, and we've got the opportunity to reallocate capital, specifically in the deeper Delaware benches and then also in the Anadarko Basin. So we have those capabilities. We don't see that -- the current commodity price causing us to shift that activity today.

Great. How do you characterize the current A&D environment for E&P assets?

I think volatility is an enemy of consolidation. And so you think of it this way, for 2 companies to come together, typically, you need a correlated unified, similar view on the forward curve. If that -- if somebody sees 80 and another person sees 60, it's kind of like the deal is over. I just don't know how you even get to the finer points that are really hard of valuation of this asset or upside in this basin, kind of the relative fuel. So I think that volatility is an enemy to consolidation. Generally speaking, I'm still very pro consolidation. I think we're in a commodity-driven business. We're in a maturing resource play world.

What that tells me is, I think Travis Stice says it well, the barrel per CEO is still out of whack. I think that can be more efficient in time. And we fully support that, look, we want to do the right things for the shareholders. We want that efficiency to accrue. We want to be the ones that should be viewed as the natural consolidator to the innovators. And in doing so, I think this business optimization project gets us closer to that point. That is where we're going to be more efficient. We're going to be the best stewards of the resources. We're thinking holistically about how do we create value, not just in the near term, but also in the long term. And I think that's the winning recipe.

Let's switch gears and talk a little bit about the business optimization plan. Can you provide some of the key nuts and bolts of the program, including your cost and margin improvement targets for this year and next year?

Yes, we could spend our allocated 30 minutes just on this project. But when I think about being a new CEO, one of the things we wanted to have was that rallying cry for the organization. What I sensed was the organization was hungry to be hungry. Like what is the thing? What is the thing that we're going to go after? And so rather than something a little bit more tactical like production that is the blood line of what we do and how we create value as an organization, we want to be a little bit more holistic. And so we wanted to excite every nook and cranny of the organization to think about how do we do things better. And so we put 4 tenets out. It's an incremental $1 billion of free cash flow per year by year-end '26, okay? And we've got time stamps, what we're going to achieve in '25, what we're going to achieve on average for '26, and then we'll have this big celebration at the end of '26 when we achieve that.

But those 4 categories really encompass all parts of the organization. Yes, some of its capital. We think about the operational things that we're doing, really leaning in on simul-frac and some of the value creation techniques, how do we apply technology to how we drill wells. We're continuing to drill faster. What's that knowledge from bit to compute and how do we connect those dots? How do we think about on the second category, production? How do we think about downtime? How do we think about base declines? That doesn't get near the airtime that it deserves on value creation.

If you can take our mid-30s kind of base decline and just tick it up a couple of percentage points, that is a huge value creation opportunity. And how it manifests from the capital side is that maintenance capital becomes that much lighter. And so when we think about extrapolating the wins, we think about accruing again to the capital side of the equation. But even that production piece, that maintenance capital -- excuse me, the maintenance production work makes that lift that we need to do to maintain that production capabilities that much easier.

Then there's things like the -- from the commercial side, we are already negotiating these aged out kind of 10-year deals looking for how do we renegotiate these things for the next decade. What we saw was an alignment of several of these very meaty projects kind of coming in either now that we've already been negotiating or in the coming years. And what we're doing is we're proactively reaching out and saying, look, here's what you need from us is additional certainty. So what if we went ahead and we're only in year 8 of a 10-year deal, what if we signed up for another 10 years today? How do we lower that fixed cost because they've paid out on their -- the initial installation, the build-out, kind of that first tranche at 10 years, it's pretty expensive.

That second 10 years of maintaining all of that equipment is a significant step down. So how do we proactively reach out, work with our partners, drive that cost structure down. And I can tell you, it is a huge needle mover for us in that GP&T. The final category is corporate costs. And while some of our peers have really pointed to, hey, we're going to cut this much out of G&A, and this is how we're going to win. I can tell you, we don't have $1 billion to cut in G&A. We don't have $1 billion in G&A. And so it's a contributor, things like technology, organizational structure, some of the efficiency things, you'll see that accrue as well, but there's other corporate costs.

And what we really wanted to do was from everyone in the organization, how do we think about contributing to this bottom line. And that's what gets me really excited is some of the big things, the marketing guys are going to be able to do these $100 million big tranches. There's a couple of really, really big deals. But I think the organizational mentality around that hunger for that next nickel, dime, quarter dollar should be for everybody in the organization. And I think those -- the value creation from that mindset, that cultural change has much potential going forward as the dollars from some of these big deals at the beginning.

Great. So there's 4 major buckets. You got capital efficiency, $300 million; production optimization, $250 million; commercial opportunities, $300 million; and corporate costs, $150 million. Can you just maybe provide a brief overview of some of the opportunities that you see to really improve your free cash flow profile?

Yes. I think, again, those are the 4 categories. I kind of touched on those. We could go into depth. In fact, in our latest slide deck, we talk about each of those 4 categories. And then we spell out, I don't know, it's about 8 bullets for each one of those. So I could highlight some of the things. What I would tell you is there are undertones throughout it. One of those is technology. So one of the organizational changes we made is, we promoted the Chief Technology Officer to be part of the Executive Committee. He's a direct report to me. We have these -- this is the sessions that we do the hardest problem solving in the organization. What makes it to that team are the big needle movers, the hardest things, the things that we just can't delegate throughout the organization.

We typically meet Monday afternoons. We have a great session. All things come to that room, and Trey Lowe is a gentleman's name. Trey's contribution is every problem that comes to that table, he thinks through an opportunity of how do we drive cost structure, operational improvement, efficiency, productivity through the lens of technology. And so HR issue of the day, some other thing going on around the company, weather or whatever the thing is, how do we think about the technology lens? And is there a technology solution associated with that? And that's -- to me, that's what the incremental voice in the room, that diverse set of experiences and lenses, that's when the machine is working. And so I'm really excited about what we're doing.

I've been to a couple of outside of the industry events really focused on AI. I'm an absolute AI geek and lover. This is the industrial revolution of today. And so when I think about where we sit and the opportunities are abound, every one of those categories that we talk about, every one of those sub-bullets have an undercurrent of technology as well. We're winning on that front. I really have been surprised going into these conferences because I just don't think we're moving fast enough. Walking out of these conferences, I've been pleasantly surprised like, wow, we are quite ahead, and we are moving really well in this space. Still -- I mean, we're just scratching the surface of what this can be. And I think that's a real game changer for all industries, and we're certainly part of that.

Yes. Maybe last question on this topic is -- what have you achieved thus far of that $1 billion target? $100 million, I think, of CapEx is something that you've already mentioned. But what is already that you've achieved?

Yes. Again, we've got this spelled out in the slide deck, and first order and a commitment for me to you on every quarter coming up, we will be updating those bar charts on here's where we're at, here's how we've progressed. Internally, kind of behind the scenes, we have it much more delineated, as you would imagine. And we've got, I think it's about 4 different categories of things that are in-house that are signed up that we are seeing the benefit from today. Second category is something along the lines of we've signed, but we haven't started to see the benefit yet. Third category is we're in negotiations. We feel really good, but we haven't really captured that yet. And the fourth category is these are ideas not yet negotiated, not sure they're really going to ultimately come through.

When you stack that whole bar chart up, we exceed the $1 billion target, knowing that some of those things in that fourth quarter -- fourth category are not going to actually come to fruition. What I'm excited about is we're literally like 2 months into this project. That's a stated goal, not just of the 18 months ahead, but this is the new mindset going forward. And so when I think about the runway of options going forward, I think this -- the number -- the top line number continues to grow. In our last deck, we've talked about some of the GP&T deals. Again, I mentioned this, we have been negotiating these for quite a long time ahead of this. We've gotten those signed up. We're starting to see the benefit. Certainly by January of '26, we'll see a lot of those values come through.

As you mentioned, our capital, we've already drawn down the capital -- midpoint of capital, $100 million. That's a direct benefit there. I also want to mention because sometimes this gets lost in the translation a little bit, there are things that we're not including in this business optimization. The 2 big categories that come to mind are, number one, deflation. I don't know if we're in a deflationary environment or an inflationary environment, you have to check today's oil price. But if we are -- if we do benefit from a deflationary environment, that's above and beyond, and that's category. We're going to do our very best to try and separate that out because it's just -- it's a different set of potential wins or losses in the case of inflation.

The second thing is we recently transacted and sold our ownership in a pipeline called Matterhorn, moves from the Permian to the Gulf Coast. That was a huge win on a few fronts. The most important win is we got the pipe built. We continue to maintain our -- the capacity in that pipe. And as you know, getting gas out of the Permian Basin is exceptionally high priority. Because we were early partner on this project, we were also offered an opportunity to ride along on the capital investment. That's been a grand slam investment. We recently transacted and sold that for $370 million, our very small investment. So it's a nice multiple return. That is not -- that $370 million or the net profits or any of those things, that does not go to the $1 billion. That's a separate category. That's a home run, a nice win, but this is a separate, again, benefit to the organization. And so I just -- we're trying to keep the purity of this $1 billion and holding ourselves accountable to delivering that to you guys.

Let's shift gears to talk a little bit about the portfolio and operations. You guys started the year strong. You had a good 1Q, you bumped your production again, and you cut CapEx.

I'm sorry, say that again. I couldn't hear you.

Can you talk about -- so good capital efficiency. What are your thoughts on kind of sustaining that strong operational performance in 1Q for the balance of the year?

I think we're just getting started. I mean there's just so much upside from where we're at, and that's in all of the categories. How do we -- what I like about this business optimization, again, it's not just, hey, drilling engineers, how do we drill faster? How do we drill longer? How do we drill better? It's not just geologists, how do we delineate the field and understand where the fault blocks are that much better. It's every part of the organization contributing to the bottom line of the organization. Now there is -- it's a hard business. This stuff is always challenging. And I don't make light of that next innovation step -- it's incredible. It's nothing short of a moonshot what the resource plays have done for the U.S. economy, about $3 trillion of stimulus to the world economy, $9 trillion of stimulus and what that means, what it means to national defense, what it means to human prosperity, all those things are monumental and historic undertakings.

As we continue to roll that forward, we start thinking about what's the art of the possible continuing to go. I can tell you, I've quit second guessing our industry and our company's ability to continue to innovate. And now I think with the technology and specifically AI kind of overprint, I don't know how far it can go, but I would bet on the over on our ability to continue to innovate. Now we're working against -- so there's an operational innovation. It's working against a portfolio that is maturing all across the land, all of these resource plays are starting to get kind of the mid-innings, maybe the beginning of the latter innings of where we're at on the full spectrum of the portfolio. To date, that innovation on the operations have significantly outrun the "portfolio degradation." In fact, the productivity has maintained and gotten better and better. I would say over the last few years, it's probably plateaued as an industry.

At some point, in the future, we will see a point of diminishing returns where the operations can outrun that portfolio degradation. That's just the reality and the nature of resource plays and any subcategories of our industry over time. We're fully prepared for that. We understand that. We think that's a decade out. We feel really good about where we're at. And we're thinking about above and beyond the current portfolio, how do we continue to innovate, amend and extend the portfolio that we have today. In the meantime, I'll go back to that business optimization. First and foremost, we need to get better every single day at what we do. And I think we're making great progress on that.

Great. I want to quickly talk a little bit about efficiency gains, 7% year-over-year in the Delaware on drilling, 12% on completions. How much more is there to go?

Yes, it's a great point. So the numbers you're quoting are '25 over '24. So 7 and 12. Last year, '23 to '24, we were 15% and 15% efficiency gains, okay? So -- and you go back years before that, we even had some bigger numbers. And how does that manifest? Well, it's how much -- how many dollars are we're putting in to drill the same number of wells or maybe even more importantly, the same number of lateral feet. And so as we're drilling longer laterals and there's a lot of innovation in that space, that accrues to the bottom line. If we can get 4 miles of lateral delivering production, in one fell swoop, that's just more capitally efficient. So that's a great thing. On the completion side, same thing there.

Innovations like simul-frac, being able to stimulate 2 wells at one time and having that operational efficiency just accrues to the bottom line. Those are the big headline things, everything that people are talking about and are the big needle movers. What I would tell you is, one layer deeper into the onion, there are so many things around innovation. It's facility design. It's the time motion studies with literal stop watches on how long does it take to make a connection on the rig. And if that's a 2-minute process, how do we shave seconds off of that because that's something we do thousands and thousands of times on that one pad. And so how do we get that level of precision and those are the kind of wins that we're continuing to have and really accrue to the bottom line.

Clay, we're out of time. I had a bunch of more questions, but we'll have to get to these at another time. Really appreciate your time today.

Absolutely, Arun. Thunder up.