Devon Energy (DVN) David A. Hager on Q4 2015 Results - Earnings Call Transcript

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Devon Energy Corp. (NYSE:DVN)

Q4 2015 Earnings Call

February 17, 2016 11:00 am ET

Executives

Howard J. Thill - Senior Vice President, Communications & Investor Relations

David A. Hager - President and Chief Executive Officer

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

Tony D. Vaughn - Executive Vice President-Exploration & Production

Analysts

Doug Leggate - Bank of America Merrill Lynch

Charles A. Meade - Johnson Rice & Co. LLC

Arun Jayaram - JPMorgan Securities LLC

Subash Chandra - Guggenheim Securities LLC

Edward George Westlake - Credit Suisse Securities (NYSE:USA) LLC (Broker)

David William Kistler - Simmons & Company International

John P. Herrlin - SG Americas Securities LLC

Brian Singer - Goldman Sachs & Co.

Bob Alan Brackett - Sanford C. Bernstein & Co. LLC

David Martin Heikkinen - Heikkinen Energy Advisors LLC

Phillips Johnston - Capital One Securities, Inc.

David R. Tameron - Wells Fargo Securities LLC

Ross Payne - Wells Fargo Securities LLC

Jonathan D. Wolff - Jefferies LLC

Paul Sankey - Wolfe Research LLC

Jeff Healy - American International Group, Inc.

Operator

Welcome to Devon Energy's fourth quarter and full year 2015 earnings conference call. At this time, all participants are in a listen-only mode. This call is being recorded.

I'd now like to turn the call over to Mr. Howard Thill, Senior Vice President of Communications and Investor Relations. Sir, you may begin.

Howard J. Thill - Senior Vice President, Communications & Investor Relations

Thank you, Stephen, and good morning, everyone. I'd like to welcome you to the call as well.

Today's call is going to consist largely of Q&A, so I hope everyone has had a chance to review our fourth quarter and full-year earnings release that also includes our forward-looking guidance as well as our detailed operations report. Also on the call today are: Dave Hager, President and CEO; Tony Vaughn, Executive Vice President of E&P; Tom Mitchell, Executive Vice President and Chief Financial Officer; and a few other members of our senior management team.

Finally, I'll remind you that comments and answers to questions on the call will contain plans, forecasts, expectations, and estimates, which are forward-looking statements under U.S. securities laws. These comments and answers are subject to a number of assumptions, risks, and uncertainties, many of which are beyond our control. These statements are not guarantees of future performance, and actual results might differ materially. For a review of risk factors relating to these statements, please see our Form 10-K.

With that, I will turn the call over to Dave.

David A. Hager - President and Chief Executive Officer

Thank you, Howard, and welcome, everyone.

As we all know, 2015 provided an extremely challenging business environment for our industry. We responded during the year by proactively taking steps to align our business with these conditions by reducing field-level costs by $400 million, delivering efficiencies and cost savings and reduce capital requirements by $500 million, and we attained significant productivity gains and improved type curves and IP rates across all our core plays.

As we look to 2016, our top priority in this environment is to protect the balance sheet by balancing spending requirements with available cash flow. We also see no reason to accelerate production growth into these weak markets, which has led us to take aggressive measures to reduce our capital investment by 75% year over year.

We also have plans in place to preserve more than $1 billion of cash flow on a go-forward basis through a number of initiatives, including incremental field-level cost savings, a reduction of our workforce by about 1,000 people, and by adjusting the dividend rate to preserve over $300 million of cash flow. In an effort to further strengthen our balance sheet, we also have non-core divestitures underway, with the intent to monetize $2 billion to $3 billion of assets during 2016.

As I've said many times, Devon is in the advantageous position of having no long-cycle projects, minimal long-term contracts, and nearly all of our acreage is held by production. These favorable attributes allow us to prudently adjust our 2016 capital program to balance cash flows and to protect our balance sheet.

But it also gives us the ability to ramp up development activity when commodity prices rebound and to see a quick production response to that ramp when it happens.

Our capital program in 2016 is designed to maximize cash flow and operational continuity, with activity directed toward the lowest risk and highest impact opportunities in each of Devon's core areas. This disciplined capital program is expected to maintain relatively flat oil production from Devon's core assets compared to 2015, and we are projecting only a 10% oil decline from Q4 2015 to Q4 2016. This production resiliency is a testament to the quality of our go-forward assets. Overall top line production in 2016 from core assets is expected to decline by 6%, driven by lower gas volumes.

The efficiency of our 2016 budget is also highlighted by our ability to fund our capital program at today's strip pricing within operational cash flow, EnLink distributions, and expected Access Pipeline proceeds. Once again, we have the flexibility to ramp up spending or to make additional cuts to our spending plans depending upon how commodity prices trend going forward.

As I mentioned earlier, in addition to balancing near-term spending with cash inflows, we are also working to improve our financial position through the monetization of $2 billion to $3 billion of assets. We are in the latter stages of discussions for the sale of our 50% interest in Access Pipeline, and expect that transaction to occur in the first half of the year, potentially the first quarter.

We are also in the process of opening a data room for the sale of up to 80,000 BOE per day of non-core upstream assets in the U.S. The properties up for sale include 15,000 net undeveloped acres in Martin County, Texas and producing assets in the Southern Midland Wolfcamp, Carthage, Granite Wash, and Mississippian Lime plays.

We have had direct contact from potential buyers ranging from majors to well-capitalized peers to private equity firms. We believe these assets are substantially higher quality than those being considered for divestment by others and are in the market quicker. This gives us a competitive edge. Conversations thus far have been encouraging, and we have confidence in our ability to attractively sell these assets throughout 2016 and use the upstream asset sale proceeds for debt retirements.

Looking at our financial flexibility longer term, if commodity prices remain low, Devon has significant balance sheet strength to withstand an extended downturn. Pro forma for the Felix acquisition, which closed in early January, we had $3.9 billion of liquidity at year end, consisting of $1.5 billion of cash and $2.4 billion of capacity on our senior credit facility. Importantly, this credit facility does not mature until the end of 2019 and contains only one material financial covenant, a debt-to-capitalization ratio below 65%. At year end this ratio was only 24%.

In addition to our strong liquidity, we've done a good job managing our upcoming debt maturities, with no significant debt coming due until December 2018. Bottom line, our advantaged capital structure provides us a significant amount of financial strength and flexibility.

So in summary, I hope you come away with three important messages today. First, we are committed to living within cash flows in 2016. To do so, we have taken aggressive measures to preserve more than $1 billion of cash flow through operating cost and dividend reductions. Second, we have the financial strength to withstand an extended downturn, and we're looking to further bolster our investment-grade balance sheet with ongoing asset divestiture programs. And lastly, the quality, depth, and diversification of our go-forward asset base is unmatched. Devon has exposure to some of the best short-cycle projects in the world. We are well positioned to accelerate activity when the markets reward growth again.

With that, I will turn the call back to Howard for Q&A.

Howard J. Thill - Senior Vice President, Communications & Investor Relations

Thanks, Dave. We're going to have a lot of calls today and a lot of questions on today's call, I'm sure. So to make sure that we get to as many questions on the call as possible, as usual, I'll ask you to limit yourself to one question within an associated follow-up, and you can reprompt to ask additional questions if time permits.

So, Stephen, with that, we'll take our first question.

Question-and-Answer Session

Operator

Thank you. Our first question comes from the line of Doug Leggate with Bank of America. Your line is open.

Doug Leggate - Bank of America Merrill Lynch

Thank you and good morning, everybody. Dave, I appreciate the clarification on the asset sales process, but I wonder if you can just give us a little bit more color on your expected timing and perhaps the associated cash flow that goes along with that $2 billion to $3 billion of proceeds. I don't want to risk my follow-up here, but just for clarification, is Access still in that $2 billion to $3 billion, or is that additive to the $2 billion to $3 billion? I do have a quick follow-up, please.

David A. Hager - President and Chief Executive Officer

Sure, Doug. Good morning. Yes, we do include Access in the $2 billion to $3 billion, although there's obviously flexibility around that. And we aren't trying to predict the market, but we did make that assumption that it's in there. But it could actually even be higher depending on how everything goes.

I think there's really a misperception in the market about the quality of these assets, to be quite honest with everybody. These are very high-quality assets. You may remember that we did a non-core divestiture program about a year and a half ago after we acquired GeoSouthern, and that was really what we would consider assets that were towards the bottom of our barrel I'd say as far as asset quality. These are high-quality assets. And the feedback that we have received from the market thus far is very positive regarding the quality of these assets and the ability to transact these assets at the prices that we have assumed here. We are opening data rooms starting next week. And then soon after that, we anticipate that we'd be receiving bids here during the first half of the year and closing on these throughout the year. I'm going to turn over to Tom Mitchell, who's going to comment a little bit about the cash flow side.

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

We haven't given out, Doug, a specific cash flow number. We've talked about 80,000 barrels a day. About 23% of that is oil. And I just want to emphasize what Dave said that we've had a number of discussions with parties. The interest in it is extremely robust, more than you would expect. It does lean closer to the private equity side from an interest level, but that's something that we had expected when we went out with the package. We're moving very quickly to try to get ahead of what we think may be further asset sales by other peers, and we're on that timeline right now going out here to open data rooms and move aggressively in early March.

So we're well positioned and it's a great package, and that's the feedback we're getting from the potential buyers. But on a scale basis, they're not seeing anything like this in the market, and on a quality basis they're not seeing anything like this in the market. And that's what gives us the confidence both that we'll get it done and within the ranges that we've talked about.

Doug Leggate - Bank of America Merrill Lynch

Okay. I appreciate that, fellows. My follow-up is really on the guidance for 2016, specifically in Canada and the oil sands. Based on the differentials that you appear to be assuming and the operating costs, it looks like there's a real chance that some of those oil sands projects could be negative cash flow. I'm just wondering if that's the right interpretation and how you plan to manage through that in terms of maintaining production if oil prices remain depressed. And I'll leave it there, thanks.

David A. Hager - President and Chief Executive Officer

I'm going expand your question just a little bit, Doug. We think we have a great benefit here at Devon, as I've been saying. We are just short-term project oriented. We do not have to continue investment into longer-term projects that no longer make economic sense such as in the deepwater, LNG projects, anything like that. So we have the ability to flex our capital down, and we have the ability to flex our capital back up very quickly. We have maintained – despite the employee reduction we're going through right now, it's very important to us to maintain the organizational capacity to flex our program back up should we see encouragement in prices.

We just don't think it makes a lot of sense to accelerate production into a $30 oil and $2 gas price environment currently. But if we see some encouragement, we have the organizational capacity. We'll have the service companies lined up where we can quickly accelerate this, and then there would be a commensurate adjustment in our production guidance. We have extremely high-quality projects. There's no question about that. We're just showing financial – the appropriate financial behavior here given where prices are currently. Now, I'll let Tony talk to you a little bit more about the oil sands and where that stands and where we stand on opportunities in the U.S. on the oil side too.

Tony D. Vaughn - Executive Vice President-Exploration & Production

Okay. Thanks, Dave. And, Doug, just going back to your question about Canada, on the co-flow side of the business at our Bonnyville location, we've got a lot of flexibility there. So we evaluate all those wells, and we're capable of shutting in those wells when they become uneconomic on a well-by-well basis without any concern about the degradation and ultimate recoveries.

When you get into the SAGD [Steam Assisted Gravity Drainage] portion of the inventory there, we think we have the top-tier asset in the play. And we would probably be the last company to have the stress on us from a profitability or immediate cash flow projections. If you look at our capital demands for 2016, it's minor. It's minor in 2016, so we've got a lot of flexibility. There may be month-to-month that we have a neutral cash flow in the SAGD operation. But again, we probably have the best project there.

I guess when I go back and start looking at our ability to grow oil, we've got the most flexibility and more immediate impact will be on the U.S. side of the business. There we've got the best inventory or access to the best inventory in the Delaware Basin and STACK and the Eagle Ford. So we're ready to ramp up. We've got a deep inventory. We have all the permitting and required work done ready for that ramp-up. So as soon as we generate additional cash flow in the company, we'll be back to work and we'll be growing that oil base.

Doug Leggate - Bank of America Merrill Lynch

I appreciate the clear answer, guys. Thank you very much.

David A. Hager - President and Chief Executive Officer

Thanks, Doug.

Operator

Thank you. Our next question comes from the line of Charles Meade with Johnson Rice. Your line is open.

Charles A. Meade - Johnson Rice & Co. LLC

Good morning, everyone. Dave, I think you alluded to this, and I apologize if I missed it. But can you be a little bit more specific about what kind of oil and/or natural gas prices would incentivize you to pick up activity in the back half of 2016, assuming all these asset sales get done, and maybe offer an opinion on which plays or which areas you'd be most likely to accelerate?

David A. Hager - President and Chief Executive Officer

Charles, we are currently looking at an anticipated cash flow neutral budget at strip pricing from our operational cash flow, the EnLink distributions plus anticipated Access Pipeline proceeds, which by the way, we still have a high degree of confidence we are going to execute on. That has not changed. So at strip pricing, we'd be cash flow neutral.

If we see prices – if we see the strip moving up, and we have confidence it is going to continue to move up, that's when we would consider increasing activity. And again, all of our projects are short-term, so we can ramp back up very, very quickly. You saw that we ramped down quickly. We can ramp back up just as quickly. There is no issue there. We just feel that we are being prudent given the current commodity price environment.

And where would we ramp up? Tony I think answered it. There are three areas that really have strong economics for us. Those are the Eagle Ford and the Delaware Basin and in the STACK play, and we'd be looking at all three of those plays to see where we'd put the rigs. But they all would have fairly similar economics and strong economics.

Charles A. Meade - Johnson Rice & Co. LLC

Got it, that's helpful, Dave. And then that's a good segue also to the next question I was going to ask, which is about the big improvement in the STACK results you had that you released this quarter. I think I asked a similar question last quarter about what was driving the variance in well results across that position. And maybe now I would ask that question again, but also ask you what's driving that improvement over time as well?

David A. Hager - President and Chief Executive Officer

I'll let Tony take that, but I'd just say we think this combined, we said it last quarter. We're in the best part of the STACK. We're in the heart just like we are in the Eagle Ford with our position we acquired there. We're in a volatile oil window, plus we have multiple pays, and we're moving through the appraisal process right now. And we knew it was going to get better, and frankly it's getting better. It's going to keep getting better. We've got the best inventory in the industry right now. But I'll let Tony go through the details on that.

Tony D. Vaughn - Executive Vice President-Exploration & Production

Charles, you're right. If you look at our operating report, we commented on about 12 Devon wells that we brought on in the Meramec and another eight that were brought – or another four that were brought on in the Felix position. All of those really were above our type curve. In fact, on the majority of those wells that we continued the Felix operations, the wells were not only high rate but they were also about 60% oil. So it was above our overall modeling that we had done previously.

I think the work that we're continuing is really a follow-up to the good work that the Felix team was doing. They have really focused on the optimal landing zone in each of these Meramec intervals, a lot of detail and concern about maintaining the largest amount of footage drilled in the Polasti (19:46) interval there. We continue to advance the completion designs. We're pumping about 2,500 to 2,700 pounds per lateral foot, so we're loading these completions up with a lot of sand. We're using – the majority of our fluid is a slickwater-based fluid with some crosslinked gel in that. So we're experimenting with the fluid type there.

So I think all that combined is just leading to improved completions well to well. And I think we commented the last time we were on a call with you that really the outstanding thing that we really like about the STACK play is really the volatility of the results is very narrow for a very young play like we have at STACK. So we're very optimistic and we're ready for an increased run rate, increased activity level there when the opportunity arises.

Charles A. Meade - Johnson Rice & Co. LLC

Thanks, Tony. I have the same recollection; and congratulations on your new position.

Tony D. Vaughn - Executive Vice President-Exploration & Production

Thank you.

Operator

Thank you. Our next question comes from the line of Arun Jayaram with JPMorgan. Your line is open.

Arun Jayaram - JPMorgan Securities LLC

Good morning, gentlemen. Tom, I wanted to start with you. Obviously, Devon has taken some aggressive action on the cost front and CapEx front. I was wondering if you could comment on any discussions you've had with the rating agencies and your confidence about maintaining Devon's historical investment-grade credit rating.

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

Good morning, Arun. Thanks for the question. Obviously at the end of the year you go before the agencies to give them your year-end results and talk about the reserve profile within the company. So we've been through that exercise with all of them. You've seen the results of that, so let me start with that. So S&P has taken us to BBB and a stable position. And we've got Fitch having concluded their rating, currently at BBB+ and also stable. So we've got two solid investment-grade positions there, which pretty much assures us as an investment-grade company.

Moody's is a different story. I think you're aware of that as well as others listening that they're debating what they're going to do. There are a lot of moving parts there. And quite frankly, it's hard for us, or I think anybody at this point in time, to tell exactly what they are going to do with this group. They've already made the decision on the non-investment-grade group, which resulted in multiple-notch downgrades. They've taken a very low price deck view of not really rating through the cycle but rating closer to the bottom of the cycle. And they're shifting how they're thinking about investment-grade. So on a historic model, I feel pretty comfortable that we would be okay. It's just very difficult at this point in time to tell exactly how they're going to recalibrate what they consider to be investment-grade. And that decision-making process is in is in play as we speak and probably concluding before the end of the month.

So I wish I could give you a more firm answer on that. I think the decisions that we've taken here, while they were really primarily targeted at the business, not the rating agencies, are also credit enhancing and should be confidence inspiring to the agencies. And that's the best we think we can do is to really focus on the business and let the rating agency portion fall where it falls, given of course the fact that we want to continue to maintain our strength in investment-grade and position ourselves as best as possible.

Arun Jayaram - JPMorgan Securities LLC

That's helpful. My follow-up is just really regarding the Q4, if you guys could comment a little bit on the Q4 2016 exit rate. Just going through the math, it would suggest U.S. volumes down in the low 90,000 barrels per day on the oil side. I was wondering if you could comment if you agree with that in terms of the exit rate given lower CapEx. And just talk about – that would imply quite a bit of loss in operating momentum into 2017. How quickly do you think that – if you got a price signal, could you regain that operating momentum?

David A. Hager - President and Chief Executive Officer

Arun, what I'm trying to emphasize to everybody here is that we are probably uniquely positioned with the ability – with the fact that all of our projects are short cycle time projects. They're all well oriented projects. We don't have any long-term projects within the company. And so that gives us tremendous flexibility to decrease our capital, such as we've done just now when we're in a very low commodity price environment, and the ability to ramp up capital spending and see commensurate results on the production side should we get some encouragement.

So we can make immediate decisions around ramping production back up. We have the projects ready. We have the permits ready. All we have to do – we have the wells designed. All we have to do is hire the rigs and drill the wells, and then you'll see production impact anywhere from – some will be completed immediately. Some are pad drilling and may take up to six months or so to see the production impact from those, but you start seeing response from higher capital spend very, very quickly for us. Tony might even be able to fill you in with a little bit more details on that than what I just said, Arun.

Tony D. Vaughn - Executive Vice President-Exploration & Production

Arun, when we look at – when we do our forecasting work for the year, we're confident in the ability to forecast most of our properties. What I would comment on is the Eagle Ford has got – the wells have such a high productivity index. The wells have such a high productivity index there's a little bit more range of error included in that forecast. And as you know, the amount of – or the pace of our activities is being modified as we go through the year. So that one property alone is the one that can drive an outperformance compared to how we had forecast.

I'd also like to point out that we know with a limited capital program we're completely focused on the base management of our business. And we've talked about it over the course of the last 18 months that we've transformed our capabilities internally here. I think you're starting to see a lot of the results from that in public data. We have the highest 90-day Junes (27:00) in each of the four basins that we're driving capital towards. So we're pretty confident that we'll outperform. I think you saw that quarter to quarter over the last six or eight quarters from us. A lot of that's going be driven just by the management of our base. And so we've got – personally I've got a lot of confidence that we'll beat the curve that you're describing.

Arun Jayaram - JPMorgan Securities LLC

I'd just suggest real quickly is that the guidance if I were to summarize the comments, maybe a glass half empty in terms of well productivity – maybe provide a little upside if you perform better than that in terms of – you highlighted the Eagle Ford.

Tony D. Vaughn - Executive Vice President-Exploration & Production

I think that's correct. I think, Arun, as we continue to see results in the STACK play, we've commented about the type curve there. We're already at that type curve. And so we'll continue to modify that as results continue to improve. So I think there are going be positives to the forecast.

Arun Jayaram - JPMorgan Securities LLC

All right, thank you.

David A. Hager - President and Chief Executive Officer

Thanks, Arun.

Operator

Thank you. Our next question comes from the line of Subash Chandra with Guggenheim. Your line is open.

Subash Chandra - Guggenheim Securities LLC

Hi. My question is I guess the roadmap for asset sales and use of proceeds. You talked about paying debt down. If I think of hypothetically $2 billion to $3 billion, how do you think of how that would be deployed? Would it be 100% for debt reduction? I presume bank debt and near-term maturities, or is there some of it that you might reconsider for the drill bit?

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

Hi, Subash. This is Tom. What we've said to you guys is that the Access proceeds would be to fill the funding gap in the capital program this year. And that the proceeds from asset divestitures, the sale of our producing properties will be targeted for debt repayment.

So how we mechanically go about that debt repayment, we're still debating how exactly to go about that. Our bonds on the long end of the curve are trading well below par, so you actually get a big bang for the buck if that holds and you're able to redeploy the capital from the divestiture into those bonds. Whether we to that immediately or not is yet to be determined. This is a pretty volatile environment, but that's the target right now. So you'd have Access wherever it comes out filling the funding gap, and then the rest of it for debt repayment.

Subash Chandra - Guggenheim Securities LLC

Okay, thanks for that clarification. And then I guess secondly, is there a way – you mentioned that you want to preserve your optionality so you're organizationally capable of high levels of activity. Is there a way to put a rig number to it on what you think the peak rig count you can do after this resizing?

Tony D. Vaughn - Executive Vice President-Exploration & Production

Subash, I think it's going be driven by our cash flow opportunities that we generate here in the company. We've got the capabilities internally to ramp quickly back up to a 20-rig program if we had the business environment to do that. So we really are not inhibited by the ability to execute. We think we have the permits in place in the core – or the core of each of our four areas. So it's really going be predicated on how we generate cash flow for the year.

David A. Hager - President and Chief Executive Officer

Subash, that is a 20-rig operated program, not including the Eagle Ford where BHP operates that activity. And also we do a lot of activity 50:50 with Cimarex up in STACK play. And so those rigs would be in addition to the 20-rig program that obviously we can manage.

Subash Chandra - Guggenheim Securities LLC

Right. Right, so that could be 25 to 30 rigs. Okay, thank you very much.

David A. Hager - President and Chief Executive Officer

Thanks, Subash.

Operator

Thank you. Our next question comes from the line of Edward Westlake with Credit Suisse. Your line is open.

Edward George Westlake - Credit Suisse Securities (USA) LLC (Broker)

Good morning and thanks for all the color in the ops report, but I'll probably have to stick with balance sheet questions. A downside and upside case, folks are worried about recession. You've highlighted the quality of the assets that you're selling this morning. But say for example the strip price even rolls into 2017 because of some economic weakness. What would be the game plan to manage the downside? Then I've got an upside question to follow.

David A. Hager - President and Chief Executive Officer

Hi, Ed. First off, we've already taken a lot of steps obviously to reduce our operating and G&A costs by around $800 million. The dividend payments, we've reduced those significantly by around $320 million, adjusted our capital program. We have the asset sales going on. So we think we're in a good position even if the strip or slightly lower does come in, in 2017. We would obviously be looking in 2017 at all available options that we have to us as a company, just as we did coming into 2016. Could they be – is there availability for further reductions on operating expense and G&A? We could review the dividend policy, equity offerings, asset sales. We have a lot of bullets in our gun, I guess you'd say, that we can fire here in order to really maintain our financial strength during these challenging economic times, and we just evaluate each of those and see which makes the most sense.

Edward George Westlake - Credit Suisse Securities (USA) LLC (Broker)

So I hear that you would be willing to sell perhaps even some of the I guess Tier 1 acreage if you had to if say oil stayed low for two years.

David A. Hager - President and Chief Executive Officer

We would certainly consider that. I'm not saying we are going to do that, but we would certainly – our focus of probably – we'd have to make a decision whether it makes more sense to look at the oil side, or we also have some very large gas assets sitting out there, so we'd have to look at that as well. So I'm not going to say we would do one or the other. There are no sacred cows around here, and we would certainly evaluate all the available options and see which we think generates the greatest value for the shareholders. We obviously have to be mindful of the cash flow that's generated by these, and we would do all the appropriate analysis when making our decision. We'd look at all available options to see how we can best handle that, should that situation occur.

Edward George Westlake - Credit Suisse Securities (USA) LLC (Broker)

And then on the upside case, say oil does recover to some mid-cycle pricing. I appreciate everyone would have a different view of what that is. You seem like you're resource-rich, and the access to liquidity is probably constraining what you could do in terms of activity. So some other companies have been relatively successful in viewing themselves as startups and issuing equity for growth capital. Is that something on the upside case that you would consider?

David A. Hager - President and Chief Executive Officer

Again, I hate to rule anything in or out. But if we get a price recovery to more like a mid-cycle case above the current strip, then we would have incremental cash flow available to reinvest back into the capital program. And I think that's the first place we'd look for our funding is just for the incremental available cash flow from higher prices.

Edward George Westlake - Credit Suisse Securities (USA) LLC (Broker)

You have to use cash from opposite the first accelerated driver.

David A. Hager - President and Chief Executive Officer

Yes.

Edward George Westlake - Credit Suisse Securities (USA) LLC (Broker)

Okay, thanks.

David A. Hager - President and Chief Executive Officer

Thanks, Ed.

Operator

Thank you. Our next question comes from the line of David Kistler with Simmons & Company. Your line is open.

David William Kistler - Simmons & Company International

Good morning, guys.

David A. Hager - President and Chief Executive Officer

Hi, Dave.

David William Kistler - Simmons & Company International

Following up a little bit on the 2016 and even some comments towards what 2017 might look like, maybe to frame that up, could you mind sharing, as you talked about managing base decline, where base decline was in 2015, and where you project it to be in 2016? Kind of helps give us an indication maybe to where 2017 would shake out.

Tony D. Vaughn - Executive Vice President-Exploration & Production

Our overall base decline has really been running about – roughly about 20% for the company. On the gas side, especially in North Texas, the technical team and the operating group in North Texas have done an outstanding job to minimize the decline using plunger lifts and line pressure reductions. They managed to arrest that decline, and it's been running about 11% per year. Our oil decline, because it's fairly new investments, it's much greater and it tends to be over 30%. So on a combined basis it's still around 20% year over year, and I wouldn't expect that to change going into 2016. I think we still have a high degree of focus on our base business. We're continuing to improve our artificial lift operations. Our downtime is continuing to be minimized and improved as we go through our work; so high optimism that we'll continue to have wins on our large base business.

David William Kistler - Simmons & Company International

I appreciate that. And then just one – thinking about activity in the Delaware right now, on the last call you talked a little bit about the BLM and permitting process there can be a little bit challenging. But obviously reduced activity I would assume puts you in a better position there. I'm just trying to get color on your thoughts there, and does that fit part and parcel with being able to accelerate there as you're able to maybe permit more ahead of a potential ramp up?

Tony D. Vaughn - Executive Vice President-Exploration & Production

I think, Dave, just as you mentioned, our activity is down in comparison to where it was a year or two years ago. So the permitting requirements are not near as onerous on us as they have been. That really hadn't stopped our desire to have a great working relationship with the BLM, especially in southeast New Mexico. That relationship is extremely high. We just entered into the ability to work with that office there under a master agreement type concept, which we believe we'll be able to communicate more of a full development plan with them and get all the right-of-way permitting done collectively. It won't include the individual APDs for the wells that we'll propose. We'll have to come back and follow up with that. But it will greatly accelerate our ability to ramp back up.

So we're continuing that relationship, and we're confident that we can have those wins that we've had in southeast New Mexico and take those to Wyoming and be able to ramp back up in the Powder River Basin in that asset as well.

David William Kistler - Simmons & Company International

Okay, I appreciate that incremental color. Thanks, guys.

David A. Hager - President and Chief Executive Officer

Thanks, Dave.

Tony D. Vaughn - Executive Vice President-Exploration & Production

Thank you, Dave.

Operator

Thank you. Our next question comes from the line of John Herrlin with Société Générale. Your line is open.

John P. Herrlin - SG Americas Securities LLC

Hi, guys.

David A. Hager - President and Chief Executive Officer

Morning.

John P. Herrlin - SG Americas Securities LLC

I've got a question for you on MLPs and EnLink, Dave. Some of the more leveraged E&Ps are roiling the MLP market as folks are worried about transportation, contract changes, things like that. How do you view EnLink? Has your perception or has your strategy changed at all with it because it seems like you're getting penalized for the carnage to the MLP market?

David A. Hager - President and Chief Executive Officer

Hi, John. Our strategy has not changed at all with regard to EnLink. We think that we have a great relationship with them. They provide outstanding service to us. We also like the fact that we are aligned with them in our new acreage in the STACK play that we acquired from Felix, with them acquiring the Tall Oak assets. That gives us great confidence as we put capital against that program that we're going to have outstanding service to get those wells hooked up in a timely manner. And so our strategy really has not changed in regard to that. We certainly believe that the agreements we have with them are important and the volume commitments and the rates that we agreed – the tariffs we've agreed to pay are bound by contract, and we plan to live up to those agreements. So there's really no change that's been in our relationship and our feeling about them from a long-term strategic value.

Now having said that, we obviously look at everything in our portfolio. And so if there is a reason why that should change, again, we like it long term. We will never rule any asset or anything as an absolute sacred cow where we don't look at the best business decision if we should go another direction. But right now, we don't see a reason to go another direction with the EnLink relationship.

John P. Herrlin - SG Americas Securities LLC

Okay. Thanks, Dave. One last one for me, you mentioned tighter spacing in your ops report in the Bone Spring and the Leonard. Is that going to be the future from a development perspective there, that you'll be doing tighter horizontal well spacing?

Tony D. Vaughn - Executive Vice President-Exploration & Production

Yes, John, this is Tony. I think you're right about that. We're actually having a lot of encouraging results right now on our downspacing pilots, especially in the areas that have original reservoir pressure. So if you look – we historically have landed the Second Bone Springs in the lower section of that package. And then we've staggered some what we call A-sand wells in above that and are seeing very encouraging results.

It's early on the areas that have partial depletion. We would expect a little bit less ability to downspace, but the data is still coming in, and we'll understand that better as we go through 2016. And of course, all this is really tied to oil price. And so there will be a direct relationship to spacing for all of us and the business environment as we go forward.

John P. Herrlin - SG Americas Securities LLC

Thanks.

David A. Hager - President and Chief Executive Officer

Thanks, John.

Operator

Thank you. Our next question comes from the line of Brian Singer with Goldman Sachs. Your line is open.

Brian Singer - Goldman Sachs & Co.

Thank you, good morning.

David A. Hager - President and Chief Executive Officer

Good morning, Brian.

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

Good morning, Brian.

Brian Singer - Goldman Sachs & Co.

Going back to the balance sheet, what are the metrics that you regard as most important for Devon? And will the asset sales and the dividend cut get you to where you want to be from a leverage perspective? Or per some of the earlier questions, are you considering more actions in your base case scenario as opposed to a downside scenario?

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

Hey, Brian. This is Tom. I think the asset sales go a long ways towards getting us where we want to be. And if you're on historical metrics, I think that pretty much works, and that's what you're seeing from S&P and Fitch.

Now like I said earlier in my previous comments, it's just really hard to tell where Moody's is going to shake out. So we're leaning really more on a historical view of what those metrics have been, which is not just cash flow metrics. It also involves a fairly healthy component of size and scale. But on Moody's, it's just extremely difficult at this point to answer your question.

Brian Singer - Goldman Sachs & Co.

Got it. So the underlying then goal here is investment-grade credit ratings from all three ratings agencies. Whatever metrics they look at would be what you would want to gear the strategy towards.

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

We maintain investment-grade status with just two rating agencies. So we really – regardless of what Moody's does, we stay in the investment-grade indexes. So while we'd like that, it doesn't damage our investment-grade status if they were to drop us below.

Brian Singer - Goldman Sachs & Co.

Okay, thanks. And then my follow-up is with regards to the – staying within cash flow. If and when oil prices do improve, should we just expect a straight CapEx equals cash flow type strategy? And how does the EnLink business apply here? If there's outspending, including the impact of distributions on a consolidated basis, at the EnLink level, does that weigh in your decision, or is it solely Devon and Devon only?

David A. Hager - President and Chief Executive Officer

It's essentially Devon and Devon only on that, Brian. And I think that would be the first thing I would say is to look at just a straight how much incremental cash flow we would have and putting that to work back into E&P capital. That's a good first proxy. Obviously, we would look at longer term what we think prices are going do. And if we have even greater confidence they're going to be moving up significantly in the future, we might be willing to ramp up even a little bit more than that. Conversely, if we think it's a temporary phenomenon, we may ramp up a little bit less. But I think that's a first good proxy of how to think about it.

Brian Singer - Goldman Sachs & Co.

Great, thank you.

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

Thanks, Brian.

Operator

Thank you. Our next question comes from the line of Bob Brackett with Bernstein. Your line is open.

Bob Alan Brackett - Sanford C. Bernstein & Co. LLC

Hi, good morning, question on the Access Pipeline sale. Your partner in the pipeline has made some noise about potentially selling their stake as well. Does that help your process, does it hinder it, or is it a push?

David A. Hager - President and Chief Executive Officer

It's really independent of that, Bob. We each have our own processes going on for that. Frankly, we think we're probably a little more advanced in our stage of the process than our partner is in looking at their 50%. But it's really two independent processes at this point. And like I said, we remain very confident that we are going to be able to transact on that sometime in the first half of the year. It could potentially be as early as the first quarter, but no guarantees on that.

Bob Alan Brackett - Sanford C. Bernstein & Co. LLC

Great, thanks. And to follow up, in terms of the price you might get for that asset, can we use the capital you've put into that asset as a decent proxy, or would we be far off if we did that?

David A. Hager - President and Chief Executive Officer

You wouldn't be too far off with that probably.

Bob Alan Brackett - Sanford C. Bernstein & Co. LLC

Great, thank you very much.

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

Thanks, Bob.

Operator

Thank you. Our next question comes from the line of David Heikkinen with Heikkinen Energy Advisors. Your line is open.

David Martin Heikkinen - Heikkinen Energy Advisors LLC

Hey, Tom. Actually you're in a pretty unique position where you can maintain investment-grade, so you can talk pretty openly about some of the concerns for investors around what happens to an E&P company when you lose investment-grade. What are the steps that goes on in thinking about your credit facility being secured, hedging facility, any firm transportation changes? I just would be curious about your perspective.

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

Let me just emphasize again so people are clear. Nothing would happen to us with a Moody's shift. And even if we had a bad result from another rating agency, our liquidity position is solid and doesn't change at all. So there's nothing in our revolving capacity, our debt, our bank debt capacity that changes in that circumstance. Those covenants remain the same. Nothing gets triggered. There's nothing in our public debt or our indentures that would occur if that is the case. I think the real impact to those that this occurs to would just be access to the capital markets and primarily at cost. You'd be dealing with higher costs as you tap the markets.

Our revolver has got a lot of term left on it. You're out into 2019 before that term is up. So a lot is going to happen between now and that point in time. Those who have to renegotiate now are going be dealing with a totally different environment. And I think the uncertainty that you're seeing out of the agencies on how they approach this is going to reach into those types of negotiations. You'll have people who have got near-term debt concerns just dealing with an uncertain bank market and an uncertain capital market.

The bondholders that I've spoken to are equally confused by this and don't know necessarily how exactly it's going to shake out. Some of them are – we don't think in our portfolio of debt holders that there's a lot that would be dependent on Moody's, but there potentially could be some selling of bonds for those investors who require a Moody's and an S&P rating both to hold debt, so that could also be another impact. But just to reemphasize for Devon, Devon really nothing would have – if we were taken fully non-investment-grade, which is not going to happen, there would be no change in our debt picture.

David Martin Heikkinen - Heikkinen Energy Advisors LLC

And nothing on the commercial paper side either?

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

Your commercial paper program, your access to it, and people's ability to trade in that is going be weakened if you've got somebody that goes to non-investment-grade. It's not taken away for us. That really just amounts to a cost of debt, not an access issue.

David Martin Heikkinen - Heikkinen Energy Advisors LLC

I think it's more critical for companies with international assets and bigger projects, so that's helpful. On the other side, just cash flow neutral, does that include EnLink distributions? I just want to make sure I'm getting that correct.

David A. Hager - President and Chief Executive Officer

Yes, it does, David.

David Martin Heikkinen - Heikkinen Energy Advisors LLC

Okay, that was it. Thank you, guys.

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

Thank you, David.

David A. Hager - President and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from the line of Phillips Johnston with Capital One. Your line is open.

Phillips Johnston - Capital One Securities, Inc.

Hey, guys. Thanks, just a quick housekeeping question on Jackfish. The ops report shows that unit LOE was below $10 in fourth quarter. Just wondering if you could tell us what the total operating cash cost was in the fourth quarter, including the blend cost, and maybe where cash costs are running today given the recent weakness in the Canadian currency. Thanks.

Tony D. Vaughn - Executive Vice President-Exploration & Production

It's about $7.00 for the blend costs, Phillips.

Phillips Johnston - Capital One Securities, Inc.

Okay. Has the total cash cost come down since then, I guess with the weakness in the Canadian currency?

Tony D. Vaughn - Executive Vice President-Exploration & Production

Come down since – it's trading today at about where it was trading through the fourth quarter. It's around $0.72.

Phillips Johnston - Capital One Securities, Inc.

Okay.

Tony D. Vaughn - Executive Vice President-Exploration & Production

Where the exchange rate is, so it hasn't weakened further. It weakened throughout the year and gave us a significant uplift on the reduction in costs that you saw, but it hasn't continued to weaken in the first part of this year.

Phillips Johnston - Capital One Securities, Inc.

Okay, got it. Thank you.

Operator

Thank you. Our next question comes from the line of David Tameron with Wells Fargo. Your line is open.

David R. Tameron - Wells Fargo Securities LLC

Hi. Good morning, a couple questions. If I just think – and I'm thinking about what I've seen you do in the Meramec as far as well costs, the Eagle Ford, et cetera, I guess a two-part question. One would be how much more room – let's just assume service costs and the forward strip stays where it's at right now. How much more room do you have as far as cost reductions available in the next two to three quarters? How much more downside do you see there?

And then the second piece would just be, you talked about your core assets and them all being economic today. Philosophically, how do you guys think ability the big picture, the U.S. and crude prices? I'm just trying to chase that marginal cost type number.

Tony D. Vaughn - Executive Vice President-Exploration & Production

Dave, let me start on the operating side a bit. We would estimate that the 2016 costs in comparison to 2015 might be down another 4%, and it varies by category of course. We still think there are operating efficiency gains that we will have. As you roll back about 12 months ago, we saw – early in the year we saw a nice improvement in the service provider de-escalation component. But in the second half of the year, we saw great efficiency gains with just optimizing all of our well construction designs, optimizing the execution of our wells. We had very little trouble time. All that has accelerated our time to TD. We're getting better wells completed because of the focus on that detail, so we'll continue that. And historically, we've always seen somewhere between a zero and 10% efficiency gain, and I wouldn't expect anything different than that by the time we get to the end of 2016.

David A. Hager - President and Chief Executive Officer

David, just to expand a little bit on your question, we have certainly seen third-party studies that show that our acreage in the Eagle Ford in DeWitt County is probably the most economic acreage in the Eagle Ford, and I think it competes well with any play in onshore North America. I can also tell you that we see very similar economics to DeWitt County in the heart of our plays in the Delaware Basin and in the STACK play. So we think that we have certainly three of the plays in our portfolio that position us with the most economic opportunities that you might find in onshore North America.

And so it's not a question of the strength of the portfolio at this point. It's a question of how much capital are we going to put against that strong portfolio. I just want to emphasize one last time. We've taken capital down significantly, and we understand that. It's because we had the flexibility to do that in this current $30 oil and $2 gas price environment. But we have the ability to ramp that capital back up just as quickly and bring production back just as quickly should we see encouragement on the commodity price environment. So we said the first priority right now is balance sheet. That's what we're doing, but we have the ability to ramp it right back up and get back in the game.

Tony D. Vaughn - Executive Vice President-Exploration & Production

David, I'd draw your attention back to the operating report on page 12. You can just look at our Cana results and the Woodford, and you'll see that we've dropped our time to TD from 40 to 20 days, so we've actually decreased the drill time in half. And after 800 wells, as we've talked about our continuous improvement on the completion side, after 800 wells being drilled and completed, we're still seeing the highest IPs of the history of the Cana-Woodford work.

David R. Tameron - Wells Fargo Securities LLC

All right, thanks. I appreciate that.

David A. Hager - President and Chief Executive Officer

Thanks, Dave.

Operator

Thank you. Our next question comes from the line of Ross Payne with Wells Fargo. Your line is open.

Ross Payne - Wells Fargo Securities LLC

Hey, guys. I think we've worn out the rating agency discussion, but I also wanted to just ask you just a simple question. Are they looking at your metrics excluding EnLink or inclusive of them? Thank you.

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

Hey, Ross, it's Tom again. It depends on which one you're dealing with. For the most part, they include it, but they include it in different ways. It's really included on a – even though this is non-recourse debt to Devon, Moody's for instance looks at it as a too-big-to-fail type situation where you would come in and support the credit in the event there were issues. So that's largely how they look at it. S&P takes them down one notch from where we are and looks at it a little bit differently.

Ross Payne - Wells Fargo Securities LLC

Okay. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Jon Wolff with Jefferies. Jon Wolff, your line is open.

Jonathan D. Wolff - Jefferies LLC

Hey, guys. Looking at the $2.4 billion available of liquidity on the unsecured credit facility, it had been $3 billion prior. I was wondering if something was drawn, maybe commercial paper termination, or was it related to the facility being reduced? That's question number one.

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

There are a lot of moving parts going through the end of the year to make payments on Felix. So the only change from our $3 billion capacity is that we paid down about $300 million of commercial paper. So that's the only thing. So net-net, your net available liquidity is pretty much close to what you saw in the ops report.

Jonathan D. Wolff - Jefferies LLC

Okay.

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

Just shy of $4 billion.

Jonathan D. Wolff - Jefferies LLC

Got it. So would you say you're still active in the commercial paper market, overnight market?

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

There has been no – it's a little bit more costly, but that's pretty much the case for anybody that's playing the CP market. Our access and our ability to deal with the CP market is unchanged at this point.

Jonathan D. Wolff - Jefferies LLC

Got it. And then I was a little confused on the mechanics on the rating agencies. Obviously, your investment-grade rating was affirmed by S&P. I guess everyone is waiting on Moody's, and I don't see a Fitch opinion since October. So is it two out of three, or is it either Moody's or S&P that creates the mechanics of...

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

Fitch left – and these are conversations between Devon and Fitch. Fitch left our rating at that level. They're not reviewing it currently, so it stands as is and it's not up for review.

Jonathan D. Wolff - Jefferies LLC

Got it.

Thomas L. Mitchell - Chief Financial Officer & Executive Vice President

What they've indicated for the whole group is that they would come out before the end of the month. Exactly when that occurs, it's hard for me to tell you. I think they had one or two more large investment-grade parties that were coming before them here in and around this timeframe right now, and then when they go out will be shortly after that, likely.

Jonathan D. Wolff - Jefferies LLC

Super helpful, thanks.

Operator

Thank you. Our next question comes from the line of Paul Sankey with Wolfe Research. Your line is open.

Paul Sankey - Wolfe Research LLC

Hi, everyone. It's notable that you've been confident about your asset sales program. Could you just reiterate that because it is so important for this year and we've been hearing quite negative things about the asset market? Thank you.

David A. Hager - President and Chief Executive Officer

I'll reiterate it. We all feel extremely confident that these assets, from all we understand, are higher quality assets than anyone else has put on the market, including some of those that have recently transacted. And we also feel that there may be other companies that may be coming out with assets later in the year, but we're beating them to the market. So, from all the feedback we get, is that our expectations are very realistic for the timing and for the magnitude of proceeds that we can expect to receive from these assets.

We have had significant contact with potential purchasers, even before we get the data rooms out there. As Tom said, it ranges from majors to some well-capitalized independents to a lot of interest from private equity, and they're frankly people who have become comfortable with this price environment and want to make an entry at this point. And the high quality of these assets frankly can be a company-maker type opportunity for some smaller companies.

And that's what some of these people are looking at, frankly, is they can start a whole company around one or more of these assets and have a very bright future. So you never know for sure obviously until you transact, but all the feedback we have gives us tremendous confidence that we're well positioned from a timing standpoint on this and with the quality standpoint to make this happen.

Paul Sankey - Wolfe Research LLC

That is firmly stated. Thank you very much.

David A. Hager - President and Chief Executive Officer

Thanks, Paul.

Operator

Your next question comes from the line of Jeff Healy from AIG. Your line is open.

Jeff Healy - American International Group, Inc.

Hi, guys. I just want to follow up again on the more balance sheet focus. It looks like in the Devon transaction slide you guys had out that you were going to issue $1.35 billion of equity. I guess I wanted to check to see if that's still the intent. And if the asset sales don't emerge that you think will be able to happen in 2016 maybe look to do more equity to help shore up your balance sheet?

David A. Hager - President and Chief Executive Officer

We've already issued the equity associated with those transactions, the $1.35 billion. Tom can give you the exact numbers, but they were issued I think a little over $44 for the Felix side and a little over $40 – $41 I think on the Powder River Basin asset. So obviously we had a nice-looking price compared to today.

As far as additional equity beyond that, we are focused on our cost reductions. We're focused on the asset sales, on the dividend reduction. I'm not going take anything off the table as far as a possibility, but we think we've taken some very significant steps to really increase the financial strength of the company with the actions we talked about today.

Jeff Healy - American International Group, Inc.

Got it. Maybe just to follow up then, if we say that Moody's has moved the goal posts and doing their own thing, would you be willing to issue equity to preserve investment-grade if necessary at the other two agencies?

David A. Hager - President and Chief Executive Officer

As Tom said, we have had our ratings at S&P. We were downgraded one but pretty stable. At Fitch, we're not up for review right now, and we're still at the previous rating there. So we are already – two of the three we already have investment-grade. As Tom also alluded to, the fact that it really doesn't change our business model significantly if we were non-investment-grade.

So we are going to do the right decisions for the business, period. We can't just chase investment-grade rating certainly with Moody's when we're uncertain what the criteria are that they're going to use. And so we're going to focus less on that and make sure that we make the right decisions for the business overall, for our shareholders, and for our bondholders.

Jeff Healy - American International Group, Inc.

Okay, I appreciate it. Thanks a lot

Operator

There are no further questions at this time. I turn the call back over to the presenter.

Howard J. Thill - Senior Vice President, Communications & Investor Relations

Okay, we appreciate everyone's interest in Devon. We wish you a good day and please let us know if you have any further questions.

Operator

This concludes today's conference call. You may now disconnect.

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