If George Mitchell is the grandfather of the shale revolution, Devon Energy Corp. is first heir and torchbearer of the movement that transformed the oil and gas industry in the U.S. Devon acquired Mitchell Energy in 2002, after Mitchell’s company cracked the code in the Barnett Shale, and led the industry into a new era of unconventional resource development, beginning with the Barnett.

Today, Devon is once again sitting atop its field of peers, featuring the highest 90-day wellhead IPs of all U.S. producers in 2015, according to IHS Markit data. That’s up from being in the third quartile just three years prior. In that time window, the Oklahoma City-based producer transformed its portfolio and its operational capabilities, as well as its balance sheet.

“This is a proxy of where the company has come from over the past two years,” said Dave Hager, Devon CEO and president. “If you think this is a solid company, but not necessarily a leader in technology or results, then that’s an out-of-date picture. This company is very focused on new technology, has tremendous assets, and has people who want to win.”

Hager joined the company in 2009 as executive vice president of E&P and took the helm as CEO in August 2015. Devon had already acquired its 82,000-acre Eagle Ford Shale position in DeWitt and Lavaca counties, Texas, for $6 billion in early 2014.

Under Hager’s watch, the company once again made a splash with a $1.9 billion, 80,000-acre acquisition of Felix Energy LLC’s Oklahoma Stack assets in late 2015, along with some 250,000 new acres in the Powder River Basin for another $600 million to double its position there. It followed those acquisitions with a $3.2 billion sell-down of other assets through this year.

Devon is now on solid footing in the Stack, the Delaware Basin, the Eagle Ford and the Powder, with cash-flow-producing assets in the Barnett and Canada’s heavy oil sector.

“We’re drilling in the heart of some of the best plays in North America,” said Hager. “Our goal is to be a North America, onshore-only focused company with assets in some of the premier plays, and to be the best operator in each of our core areas.”

Hager holds a geophysics degree from Purdue University and an MBA from SMU. He began his career 29 years ago with Mobil Oil Corp., and worked at Sun Oil Co., Oryx Energy Co. and Kerr-McGee Corp. before joining Devon. He chatted recently with Oil and Gas Investor about the company’s transformed portfolio.

“If you think this is a solid company, but not necessarily a leader in technology or results, then that’s an out-ofdate picture,” said Dave Hager, CEO and president of Devon Energy Corp.

Investor Did the downturn cause you to rethink your strategy with your portfolio transformation?

Hager It didn’t alter our strategy; it was just a continuous high-grading of the portfolio. During the downturn we found an incredible new investment opportunity in the Felix assets in the Stack play. That was at the same time prices were starting to significantly collapse, both on the oil and natural gas side. We recognized we needed to pay for that acquisition, and given the collapse in prices, we decided to target a little bit more in divestments than we paid for the acquisition.

Investor How do you determine what to cast off?

Hager We look at what we anticipate is going to receive capital funding to advance development in these areas, and if we don’t see a reasonable likelihood that we’re going to put significant funding into new capital programs in an area, then we’ll consider that a candidate for divestment. Many of these areas have viable investment opportunities; they just don’t compete among our other assets because our portfolio is so strong. Other companies can see these are good properties with good opportunities, and that allows us to capture value.

Investor Are you done with divestments for now?

Hager Yes. We are done for now. For the short term, we’ve accomplished the objective to have our assets in four to six plays onshore North America.

Investor Can you describe how you’ve driven $1 billion out of the cost structure?

Hager We’ve had a focused effort throughout the entire company on all elements of the cost structure. We recognize that reducing the cost structure will allow us to provide the cash flow to invest in new capital programs, so every dollar we save on the cost side is a dollar we can potentially invest back into high-return opportunities that we have in some of the best plays. About $400 million of that savings is on the general and administrative side. We did have an employee reduction earlier in the year. We captured about $500 million in lowering lease operating expense, primarily by a detailed focus on those field costs as well as the build-out of infrastructure in key plays: water-handling infrastructure and power infrastructure. And with lower prices and volumes, we also had about $100 million in reduced production taxes.

Investor The Stack has rocketed to the top of your portfolio over the past couple of years; what has made it so valuable so fast? Hager The Stack combines the best elements of the Eagle Ford and the Delaware. Our position there is in the volatile— or overpressured—oil window, and the liquids-rich window, which tends to give best-in-class returns. The second element is stacked pay, as the name implies. There are multiple zones that we can develop in each of these locations. It’s high return for each individual zone, and there are multiple zones to develop.

Investor At the time of acquisition, some pundits suggested it was a pricey deal, but you’ve said the acreage math is not what it seems. Can you illustrate what is being overlooked?

Hager The results that we’re seeing are exceeding the type curve we used for the acquisition. In addition, we’re seeing that we can drill more wells per section than we assumed, and that more zones are working than we assumed in our acquisition. All this means we have more resource, and the returns on those resources are higher. Also, since that time, you’ve seen prices paid in other plays more than double what we paid per acre in this play.

Investor What’s the potential of downspacing?

Hager We’re still learning that, so we don’t know the ultimate answer today. When we did the acquisition, we assumed three wells per section in the primary interval, and one in the secondary interval. We’re now testing up to eight wells per section in the primary interval, and six wells per section in the secondary interval. In some cases, there may be a third interval also. We’ve announced the results of up to a seven-well pattern in our Pump House test. That was very successful in one zone, so we’re optimistic it’s going to grow. We’re going to do 10 to 12 additional pilots over the course of the next year or so, and will have a better idea after that.

Investor What makes the difference for tighter spacing?

Hager It has to do with the nature of the completion. The new-design completions that we and others in the industry are now pumping concentrate the sand immediately around the wellbore. You’re fracturing very intensely the zone immediately around the wellbore, while still leaving the opportunity to downspace. That’s part of the overall technology improvement that’s taking place in the past couple of years.

Investor Are you seeing potential beyond the Meramec and Woodford formations?

Hager Those are the primary, but you have to understand there are probably three zones in the Upper Meramec, and two zones in the Lower, for five different intervals. In any one area, typically two to three of these zones will be developed. In addition, there’s the Woodford, and depending on where you are on the acreage, in some cases there’s Osage potential.

Investor What does your Delaware Basin potential look like?

Hager It’s a huge opportunity. We have 670,000 net risked acres by formation, with multiple potential zones that are economic, starting with the Delaware sands through the Leonard, Bone Spring and multiple zones in the Wolfcamp. It’s similar to the Stack where we’re evaluating the productivity of each of these zones across our position, and the optimum spacing to develop those zones.

Investor What is your strategy in the Delaware going forward?

Hager To focus our development drilling in a concentrated part of the play, particularly in what we call the Basin, where we think the best economics are in southern Lea and Eddy counties, and to develop the vast majority of the resource in any given location at the same time. We think that will maximize efficiencies as we move into development. That could involve development of all these zones, depending on whether they’re developed in that specific area.

Investor Can you explain the Total Resource Access Concept that you are implementing in the Delaware?

Hager TRAC allows us to develop up to nine intervals of stacked pay at the same time, with integrated surface facilities to do that. It’s the concept of having a single-surface facility that’s capable of handling a large number of stacked-pay intervals to maximize the efficiency of those elements. We don’t have to develop all the zones at the same time. It gives us the flexibility to develop what we consider to be most economic, and to go back and develop other zones should they be further derisked.

Investor How many wells do you anticipate it will take to harvest a section?

Hager We’re still determining that, but it’s going to be a very large number. We’re looking at up to three zones in the Leonard Shale, four zones in the Bone Spring and five zones in the Wolfcamp—up to eight wells per section in most of those zones. I’m not saying all of those are going to be productive, but if you let your imagination run wild, it’s not hard to get to 30 to 40 wells per section. We need to figure out how many of these intervals are going to work and what the spacing will be. Our plan is by second-half 2017, we’ll start development of our first TRAC development plan.

Investor Why is it important to proceed this way?

Hager We think planning ahead and allowing for the development of all these zones is important to the overall value. In some cases, if you don’t drill these wells initially, and you don’t have the proper facility planning, it’s difficult to come back and develop these zones economically. You may not have properly designed those facilities to handle those volumes, or your well placement may not have been proper to drill new wells. There is a great potential of leaving resource behind if you don’t think ahead about how to maximize the recovery of that resource. The industry could develop these areas on a much less-dense pattern—and drill some very high-return opportunities—but we wouldn’t be maximizing the resource recovery, and we wouldn’t maximize the value from each of these areas.

Investor By capex, it looks like Eagle Ford has fallen to third place in the portfolio. Obviously, it was a big deal for you a couple of years ago. How important is the Eagle Ford in your retooled portfolio today?

Hager We still have development potential in the Eagle Ford, but it’s not going to be the area that draws as much capital as the Stack or Delaware. We’re transitioning now to development of the remaining resource and maximizing the cash flow we get from this resource.

Investor Is it economic currently?

Hager Yes, the primary development that we’re doing in the Lower Eagle Ford has economics as good as any opportunity in our portfolio. We’re still proving up the economics of the Upper Eagle Ford. We’re just at a reduced pace because we’re through the bulk of the development. These are high-return opportunities, just not as many of them. We have about 1,000 locations between the Lower and Upper Eagle Ford. We’re at 5,000 each in the Stack and Delaware, and that’s without accounting for additional locations from the downspacing pilots we’re doing currently.

Investor You bought this at the peak of oil prices in 2014. Did the timing of the Eagle Ford acquisition go against you?

Hager To some degree, yes. We did hedge our production associated with the acquisition for two years, but there is no question the fall-off in prices from when we did the acquisition to where we are currently has challenged the economics of the overall acquisition.

Investor You did a recent acquisition in the Powder River Basin, and mentioned it delivers some of the best returns in your portfolio. What does that acquisition signal?

Hager The Rockies deliver competitive returns when oil prices are over $50 a barrel. The returns on these wells are very sensitive to oil prices because they’re about a 90% oil cut, as opposed to the Stack and Delaware that are about 40% to 60%. We think we’ve identified a fairway, based on our previous drilling and acreage we have in Campbell County, Wyoming, where we have economic development opportunities in the Parkman, the Teapot and the Turner formations. When we’re confident prices are going to be sustainable over $50 a barrel, we anticipate ramping up activity there. In fact, we plan to add a rig in the fourth quarter of this year. It can be a consistent program that delivers strong returns.

Investor You’ve identified about 1,000 existing wells in the Barnett Shale as candidates for horizontal refracks. What are you finding so far?

Hager We’ve identified that they work. Each of the refracks can provide about 2 Bcf [billion cubic feet] equivalent of reserves. If you have 1,000 locations, you’re talking 2 Tcf [trillion cubic feet] potential from the refracks overall, so there is a large prize sitting out there if we so choose to go that direction. But the economics of these are very sensitive to natural gas prices. At this point, given the high quality of our inventory, it’s not competing for capital in our own portfolio, even though we do see returns well above the cost of capital. The economics improve as gas prices improve, but of course the economics of our other plays improve because there is a pretty good natural gas component both in our Stack and Delaware plays also.

Investor Has the downturn been cathartic for the industry?

Hager I believe it has been cathartic. You’re seeing internal efficiencies that we and others in the industry have realized, that we can drill wells at lower oil and gas prices and still produce economic results. What has changed is the tremendous attention to detail. You’re also seeing a real focus on the reservoir, to make sure we’re developing these plays in the most optimum manner, particularly in regards to spacing. There have been instances where resource has been left behind because the spacing has been too wide, and instances in the industry where fields have been overcapitalized because they’ve been drilled on too tight of spacing. I think the industry is recognizing now how important these spacing tests are in order to achieve the maximum capital efficiency.

Investor What has been the catalyst for Devon adding rigs this year, and what does 2017 look like?

Hager We decreased our capital tremendously from 2015, down from about $4 billion to our initial target of $1 billion. As prices have started to recover, we’re beginning to ramp our capital spend back up, because we have so many highly economic opportunities to develop. We haven’t fully set our 2017 capital program, but I expect to see a continuing increase commensurate with the cash flow of the company. But we intend to live within cash flow.

Investor If oil were to go up another $10, where would you deploy capital first?

Hager The bulk of our capital is going to go into the Stack and Delaware plays, then we’d see some increased activity in the Rockies as well.

Investor Can you give a prognosis for oil and gas prices in 2017?

Hager I believe we’re going to continue on a slow increase in prices through 2017, although there could be periods of decreased prices. We think we’re on a path back to somewhere between $50 and $60 next year, but we’re going to test for various scenarios, both higher and lower, when we think about our strategy for deploying capital.

Investor Are you satisfied overall with your transformation?

Hager We’re proud of where we’ve taken the company from an asset viewpoint, and we’re proud of the tremendous operational improvements we’ve accomplished over the past three years. We have the financial strength to start developing these high-quality assets, and we’re very focused on winning. We’re proud of what we’ve done, but we’re not satisfied. There is a true improvement culture that exists within the company, and we think this is going to drive our results for years to come.

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