Devon Energy Earnings Call Insights: Commercial Paper and Tax-Free Repatriation

Devon Energy Corp (NYSE:DVN) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Commercial Paper

Doug Leggate – Bank of America Merrill Lynch: Hopefully, two quick one. Jeff, on the repatriation of the cash, could you just help us why you don’t have a little bit more conviction and going directly to share buybacks with the cash given where your share price is and I have got a follow-up please?

Jeff A. Agosta – EVP and CFO: The immediate thing to do is go ahead and do a repair commercial paper. We’ve got a large amount that over to $3 billion of commercial paper. Well assess the viability of a share buyback in due course like we normally do.

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John Richels – President and CEO: Let me just add one thing. One of the points that we’ve been trying to make for some time is that we haven’t constrained the types of things that we thought were the proper allocations to capital just by where the cash resided and you are very familiar with us, not everyone on the call is quite as familiar. So, let me take two second just to kind of go back to the history, as you recall, what we did is we got little over $10 billion for the sale of our offshore assets, that was about $7.9 billion or $8 billion after-tax. First thing we did is we returned 40% of it or a little over 40%, almost 50% to our shareholders through our share buyback and since that time have been investing the remaining funds into this transition of our portfolio to higher oil based property — and light oil property. So, it’s not like we haven’t been allocating that and it’s just been sitting there. I think that’s an important thing to realize. We really haven’t been constrained in our ability to allocate that capital given the fact that there has been no negative carry between borrowings in the U.S. and the amount that we’ve been earning on those funds offshore just because of the low interest rate environment. So, I just thought I’d throw that clarification out there.

Doug Leggate – Bank of America Merrill Lynch: I appreciate. I guess John in light of your efforts to release value given I guess your acknowledgment of where the share price is relative to where you think it should be. I’m just little surprised you are not getting more aggressive on the opportunity to buyback your stock at these levels. I guess that’s really what I’m saying…

John Richels – President and CEO: Well, one other thing Doug is that we have — we’ve been moving down the road here on these light oil projects that we think – give us very, very good rates of return, and it’s early days for some of these projects. It’s very hard to kind of move around, stop pursuing that program and move to a share repurchase and back and forth. So, we’ve got some large oil opportunities in this Company and it’s going to require significant levels of capital expenditure over the next while. So, we’ll continue to look at that and as you know I don’t think we’ve been shy about that at all and we bought back more stock than anybody in our peer group, and so we’ll continue to look at it very carefully.

Doug Leggate – Bank of America Merrill Lynch: My follow-up is for David. I expect it’s for David. Dave, the oil rates coming out of the Mississippi Lime, can you just give us a little more help as to where you see the type curves now for those areas, particularly as you move north into the (indiscernible) acreage because (600,000) barrels a day of oil it sounds like is even better than some of the established players in that area and turn production rates would be helpful as well?

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David A. Hager – EVP, Exploration and Production: Doug, we’re not going to get into too much specifics on where we’re getting what rates for competitive reasons. We’ve invested a lot of money and effort into 3D seismic, which we think has given us a competitive edge and so for competitive reasons I’m not going to discuss too much about this. But in general, we are staying with our type curves that we have established before. We are seeing though obviously some wells that are significantly above our type curve that I highlighted in my section of the call. That we think is directly attributable to the 3D seismic and the additional science we’re doing in the area. We are still saying that overall – over the life of the well that about 40% of the production will be oil, about 20% NGLs and remain natural gas. Early you get a much higher percentage of the production that is oil and it tends to become more gassy through time, but of course that’s a good thing because it means you are getting your value back quickly.

Tax-Free Repatriation

Charles Meade – Johnson Rice: With regards to the tax-free repatriation, I am curious, has there been some movement on the regulatory front or is this more a function of sharpening your pencil and getting created with legal structures. And when you talk about the possibility of repatriating the additional 4 billion in a tax efficient manner I am curious does that mean 0% or does that mean below some threshold of x percent?

Jeff A. Agosta – EVP and CFO: Charles, this is Jeff. Just to clarify, when we talked about the first 2 billion being moved back we didn’t say tax-free with minimal additional taxes, think in terms of mid-single digits percentages of cash taxes. And it is Devon’s fact specific there were no regulatory changes, and there are no clever legal structures being utilized. As to any amounts that we would repatriate in the future, of course, we would want to make sure that it was a tax efficient repatriation, so it would – it is not likely to be the full 4 billion, but it could be another sizable amount, similar to what we’re doing currently but that is again going to be Devon fact specific and it is going to depend upon our future tax profile.

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Charles Meade – Johnson Rice: And if that one counts for one question, I’d like one follow-up if I could with Dave. I was wondering if you could give a little more detail on the horizontal Wolfcamp wells that you drilled along the lines of the length of the laterals where in the zone that you are landing those and if you could offer a comparison with what you are doing in the Delaware Basin with Bone Springs in Delaware, both in terms of how mature the plays are and where you think they might sort out on an attractiveness?

David A. Hager – EVP, Exploration and Production: Well, they are both very attractive plays to start with. They both have strong rates of return whether you are talking about the Delaware or the horizontal Wolfcamp play. We have been targeting our wells in the horizontal Wolfcamp play to be on the order of 7,500 foot to 8,000 foot lateral length we think that’s important for the overall economics. We also have been landing zones. It depends a little bit geographically what you are talking about here, but we typically land more into lower Wolfcamp, but we also land some in the middle Wolfcamp as well. When we land in lower Wolfcamp we think we are actually communicating up to the middle Wolfcamp in many cases anyway. So, we found that to be the best and I think we are the first company frankly to start landing wells in the lower Wolfcamp and led the way on that, so another example of Devon taken a lead on it. We’re now characterizing the Wolfcamp as a development play. We have enough wells out there with a lot repeatability of results that we’re very confident that we have – we said 800 locations in the Wolfcamp and we have 1,300 locations in the Bone Springs and the Delaware, so right there over 2,000 location, so that’s what underpins our growth and I’d characterize them as essentially in the development mode at this point.