Earnings Labs

Devon Energy Corporation (DVN)

Q2 2021 Earnings Call· Wed, Aug 4, 2021

$50.80

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Transcript

Operator

Operator

Welcome to Devon Energy's Second Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded. I would now like to turn the call over to Mr. Scott Coody, Vice President of Investor Relations. Sir, you may begin.

Scott Coody

Analyst · RBC Capital Markets

Good morning, and thank you to everyone for joining us on the call today. Last night, we issued an earnings release and presentation that cover our results for the quarter and our forward-looking outlook. Throughout the call today, we will make references to our earnings presentation to support our prepared remarks, and these slides can be found on our website. Also joining me on the call today are Rick Muncrief, our President and CEO; Clay Gaspar, our Chief Operating Officer; Jeff Ritenour, our Chief Financial Officer; and a few other members of our senior management team. Comments today will contain plans, forecasts, estimates and forward-looking statements under U.S. securities law. These comments are subject to assumptions, risks and uncertainties that could cause actual results to differ from our forward-looking statements. Please take note of the cautionary language and risk factors provided in our SEC filings and earnings materials. With that, I'll turn the call over to Rick.

Rick Muncrief

Analyst

Thank you, Scott. We sincerely appreciate everyone taking the time to join us this morning on the webcast. Devon's second quarter can best be defined as one of comprehensive execution across every element of our disciplined strategy that resulted in expanded margins, growth in free cash flow and the return of significant value to our shareholders through higher dividends and the reduction of debt. Following our transformative merger that closed earlier this year, I'm very pleased with the progress the team has made, and our second quarter results demonstrate the impressive momentum our business has quickly established. Even today, as we celebrate Devon's 50th anniversary as a company this year, we're only getting started, and our talented team is eager, energized and extremely motivated to win. As investors seek exposure to commodity-oriented names, it is important to recognize that Devon is a premier energy company and a must-own name in this space. We have the right mix of assets, proven management, financial strength and a shareholder-friendly business model designed to lead the energy industry in capital discipline and dividends. Now turning to Slide 4. The power of Devon's portfolio was showcased by our second quarter portfolio was showcased by our second quarter results as we continue to deliver on exactly what we promised to do both operationally and financially. Efficiencies drove capital spending 9% below guidance. Strong well productivity resulted in production volumes above our midpoint. The capture of merger-related synergies drove sharp declines in corporate cost. These efforts translated into a sixfold increase in free cash flow from just a quarter ago. And with this excess cash, we increased our dividend payout by 44% and we retired $710 million of low premium debt in the quarter. Now, Jeff will cover the return of capital to shareholders in more detail…

Clay Gaspar

Analyst

Thanks, Rick, and good morning, everyone. As Rick touched on from our operations perspective, Devon continues to deliver outstanding results. Our Q2 results demonstrate the impressive operational momentum we've established in our business, the power of Devon's asset portfolio and the quality of our people delivering these results. I want to pause and congratulate the entire Devon team for the impressive work overcoming the challenges of the pandemic and the merger while not only keeping the wheels on but re-questioning everything we do and ultimately building better processes along the way. We've come a long way on building the go-forward strategy, execution plan and culture, and I see many more significant wins on the path ahead. Turning your attention to Slide 12. My key message here is that we're well on our way to meeting all of our capital objectives for 2021. At the bottom left of this slide, you can see that my confidence in the '21 program is underpinned by our strong operational accomplishments in the second quarter. With activity focused on low-risk development, we delivered capital spending results that were 9% below plan, well productivity in the Delaware drove oil volumes above guidance and field level synergies improved operating costs. While the operating results year-to-date have been great, the remainder of the year looks equally strong, a true test of asset quality, execution and corporate cost structure proves out in sustainably low reinvestment rates, steady production and significant free cash flow. This is exactly what we're delivering at Devon. We plan to continue to operate 16 rigs for the balance of the year and deliver approximately 150 new wells to production in the second half of 2021. Now let's turn to Slide 13, where we can discuss our world-class Delaware Basin asset, which is the driving force…

Jeff Ritenour

Analyst

Thanks, Clay. My comments today will be focused on our financial results for the quarter and the next steps in the execution of our financial strategy. A great place to start today is with a review of Devon's strong financial performance in the second quarter, where we achieved significant growth in both operating cash flow and free cash flow. Operating cash flow reached $1.1 billion, an 85% increase compared to the first quarter of this year. This level of cash flow generation comfortably exceeded our capital spending requirements, resulting in free cash flow of $589 million for the quarter. As described earlier by Rick and Clay, our improving capital efficiency and cost control drove these outstanding results, along with the improved commodity prices realized in the second quarter. Overall, it was a great quarter for Devon, and these results showcased the power of our financially driven business model. Turning your attention to Slide 6. With the free cash flow generated in the quarter, we're proud to deliver on our commitment to higher cash returns through our fixed plus variable dividend framework. Our dividend framework is foundational to our capital allocation process, providing us the flexibility to return cash to shareholders across a variety of market conditions. With this differentiated framework, we've returned more than $400 million of cash to our shareholders in the first half of the year, which exceeds the entire payout from all of last year. The second half of this year is shaping up to be even more impressive. This is evidenced by the announcement last night that our dividend payable on September 30 was raised for the third consecutive quarter to $0.49 per share. This dividend represents a 44% increase versus last quarter and is more than a fourfold increase compared to the period a year…

Rick Muncrief

Analyst

Thank you, Jeff. Great job. I would like to close today by reiterating a few key thoughts. Devon is a premier energy company, and we are proving this with our consistent results. Our unique business model is designed to reward shareholders with higher dividend payouts. This is resulting in a dividend yield that's the highest in the entire S&P 500 Index. Our generous payout is funded entirely from free cash flow and backstopped by an investment-grade balance sheet. And our financial outlook only improves as I look to the remainder of this year and into 2022. With the increasing amounts of free cash flow generated, we're committed to doing exactly what we promised, and that is to lead the industry in capital discipline and dividends. And with that, I will now turn the call back over to Scott for Q&A.

Scott Coody

Analyst · RBC Capital Markets

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

Operator

Operator

Your first question is from Doug Leggate with Bank of America.

JohnAbbott

Analyst · Bank of America

This is John Abbott for Doug Leggate. Our first question is on M&A. There has been some recent press speculation out there that you are the potential bidder in a process. Now recognizing that you probably won't comment on any ongoing potential transaction, could you just sort of discuss in general what you would see as the benefits to Devon of a large-scale acquisition given the running room that you already have from legacy Devon and from WPX?

RickMuncrief

Analyst · Bank of America

John, thanks for the question. It's a great question, great perspective. And just fundamentally, we continue to have a very, very high bar, and we have a wonderful business post-merger. And so for us, the way we think about it is anything we evaluate, and that's really on the buying or selling side, it's got to be immediately accretive. It's got to have compelling industrial logic. And we have tried to be really clear on this, but it absolutely has to feel within our investment framework and makes us even better, even stronger. And I'll just go back to just a fundamental message today. It's got a -- anything we have to consider has got to help us get stronger on an outlook that says, look, if we just keep volumes flat, we're going to add an additional $1 billion of cash flow next year. And then when you look at that on a cash flow per share base, that's 20% growth, '22 over '21. So that's really how we view it, and that hasn't really changed. We've got a tremendous inventory. We've got a tremendous business, and we continue to have a very high bar. And we're going to be very, very disciplined in anything we do.

JohnAbbott

Analyst · Bank of America

Appreciate it. And then for our follow-up question here, its on your hedging strategy going forward here. I mean you've historically had a systematic component to your hedging strategy. How are you thinking about hedging going forward from here?

A -RickMuncrief

Analyst · Bank of America

I'm going to have Jeff answer that. Go ahead, Jeff.

JeffRitenour

Analyst · Bank of America

Yes. This is Jeff. Yes, happy to provide some color on that. As you probably saw in our prepared materials and what we disclosed last night, we've not added any material incremental hedges since our last call, since last quarter. Going forward, we don't expect that to change. Given where we are in the cycle, given where we are with our business, the balance sheet, the great shape that we have the balance sheet in, the low reinvestment ratios that we've talked about, which we expect to continue going forward, and frankly, just the low-cost structure and breakevens that we have, it's created a margin of safety for us in our business that allows us to be less aggressive on the hedging front. And so we really don't feel the need to add any incremental hedges at this point in time. We'll obviously monitor that, and we certainly talk about it and debate it on a weekly basis here within the walls of Devon and could certainly change our view at some point in the future. But where we sit today, given the strength of our business and projected business and the balance sheet, we really don't feel like we need to add any incremental hedges in the near term.

Operator

Operator

Your next question is from Brian Downey with Citigroup.

BrianDowney

Analyst · Citigroup

Jeff, it sounds like from your prepared comments raising the 50% excess free cash flow payout cap may be considered at some point, given the leverage and maturity schedule outlook here. You mentioned it, but share repurchases are still listed at the bottom of your free cash flow priority slide in the appendix. Has that repurchase appetite changed much at all on the margin given the recent equity performance versus commodity price and Devon's forward yield on offer? And if you were to consider repurchases, do you anticipate that being more systematic or opportunistic?

JeffRitenour

Analyst · Citigroup

Yes, Brian, I appreciate the question. I would say the share repurchases is certainly moving up the list of options for us, potential options for us as we move through the back half of this year. I talked about it in my prepared remarks, and we've talked about it for a couple of quarters now. Our first focus is on reaching our leverage target, which you all have heard me speak to in the past. We really think about that on a $55 oil price. And so if you do the math on $55 oil, in our current oil production, you get to somewhere around $4 billion, $4. 8 billion, $4.5 billion, $4.8 billion EBITDA. We currently have $6.5 billion of gross debt, cash balance of $1.5 billion. We need a couple of hundred million more dollars of cash to get us to that net debt of kind of a 1x ratio. I really expect that's going to happen in this quarter. And as I mentioned in our prepared remarks, that puts us in a position to think about other ways to return more of that excess free cash flow to shareholders. And so things on the table are absolutely an increase in the variable dividend percentage. We're going to maintain the framework that we've outlined and don't expect that to change going into the future, but we could absolutely supplement it with some incremental variable dividends and potentially some incremental share repurchases. I think the other thing we'll look at as we get further into the year and probably into 2022 is the potential to increase the fixed dividend as well. So those are all the things that we'll be considering with our Board as we move into the back half of this year.

BrianDowney

Analyst · Citigroup

Great. And then maybe one for Clay. Clay, in the Anadarko Basin, you mentioned bringing online a half dozen or so legacy Meramec DUCs. Anything you're seeing from those production results, completion costs, or early days of the drilling JV that maybe changes your view of Anadarko returns or how it ultimately fits within the portfolio?

ClayGaspar

Analyst · Citigroup

Yes, Brian, just between you and I, I'm actually pretty positive on the Anadarko Basin. I have been for quite a while. I think it's underappreciated, generally speaking. But it's a pretty tough hill to climb to compete in our investment portfolio. So I think the team there is taking exactly the right approach. We've entered this joint venture. We've got some promoted money. It allows the investments to compete, feel really good about the investments that we're making. And then meanwhile, we're doing exactly what you're asking about is we're getting a modern look at today's well cost, today's completion designs and the well results that we're generating. So still pretty early days on the well results. But I'm very encouraged. The Miller pad is the one we're bringing on this quarter. That's the first one that we've drilled this year, bringing on -- that's really exciting. Looking forward to those opportunities, both Woodford and Meramec opportunities. But I can tell you this, the well costs are phenomenal. Really excited about that. And as you know, $1 saved on well cost is a direct dollar to present value. So it's a holistic look and we look forward to seeing more from that team.

Operator

Operator

Your next question is from Nitin Kumar with Wells Fargo.

NitinKumar

Analyst · Wells Fargo

RickMuncrief

Analyst · Wells Fargo

Yes. I want to have Jeff weigh in and help me on fielding the question, and appreciate them. Yes, I think Delaware is going to continue to be the workhorse in our portfolio. I don't see that changing. As Clay just talked about, we've got some great investment opportunities in our other basins. But the reality is the Delaware is really, really hard to compete with internally. And so you'll continue to see the lion's share of our capital program being allocated to the Delaware Basin. I don't see that really changing anytime in the near future. So Jeff, you maybe want to talk about commodity price assumptions that we have?

JeffRitenour

Analyst · Wells Fargo

Yes. I appreciate the question. And we -- as you might guess, we look at multiple sensitivities and evaluate different scenarios and price decks that might come at us. I would say foundationally though, we really think about $55 oil as kind of being a normalized price and then try to manage our business around that. We're in a position today with the low breakeven that we have in our business, even at $55 oil, we can accomplish all of our financial objectives and then some. So we feel like we're in a really good spot. But we certainly do evaluate the strip and even higher and even lower price scenarios as we work through our budgeting process with our Board.

NitinKumar

Analyst · Wells Fargo

Great. And my follow-up, you were 9% below expectations on capital spending in the second quarter. We're expecting an improvement through the rest of the year, but you left capital budget for 2021 unchanged. If I could, is that a function of any inflation that you're seeing? Or could you just help us understand the math there?

ClayGaspar

Analyst · Wells Fargo

Yes, thanks. This is Clay. I'll respond to that, Nitin. I think the idea is that we've set a course for capital. I think we're still very much inside the planned activity levels. In fact, we've accelerated a little bit just from drilling faster. We're not going to drop rigs and balance activity because of that. And so what it does is it draws a little bit more natural activity into the fourth quarter. But that said, I think it's -- I think you can kind of continue to see a very line of sight runway. I think there will be some continued improvements. I think we will also see some headwind from inflation start to creep in. I think on balance, I still feel good -- really good about reiterating the '21 capital plan. And we'll see how the team continues to perform throughout the year.

Operator

Operator

Your next question is from Neil Mehta with Goldman.

NeilMehta

Analyst · Goldman

JeffRitenour

Analyst · Goldman

Yes, absolutely, Neil. That's exactly right. I mean given the strength that we've seen in pricing thus far. And as Clay mentioned earlier, the capital efficiencies that we've seen and continued cost reductions, you marry that with the fact that we've got incremental hedges rolling off into the third and fourth quarter. All those are going to be tailwinds to our free cash flow in the quarter. And my absolute expectation is to see a higher variable dividend in the third quarter on a relative basis.

RickMuncrief

Analyst · Goldman

Neil, this is Rick. I'll augment that a little bit. I think we need to just remind everyone that we were about 50% hedged on crude this year, but the profile of that is about 60% first half, 40% in the second half. And currently, we're about 20% hedged as we look into '22.

NeilMehta

Analyst · Goldman

That's great, Rick. And just a follow-up here is, as you guys think about the payout, which right now is 50%, I think you've -- the breadcrumbs will indicate that you think there is a pathway to move that higher. Can you just talk about what the milestones we should be watching for to see when we should start to think about taking up that payout ratio from 50% to something higher, and any sense of what the ultimate destination would be in the dream world of what the right payout ratio could look like?

JeffRitenour

Analyst · Goldman

Yes. No, this is Jeff again. Again, as I mentioned earlier, that's something we're absolutely going to debate and talk about with the Board as we move into the third and fourth quarter. Again, I want to reiterate, we want to make sure we get to our debt target that I mentioned earlier, that 1x turn, which I fully expect, given where prices are, we'll accomplish that here in the third quarter. But as we move into our discussions into the fall with our Board around the budget for 2022 and the potential outcome around share repurchases, the fixed dividend and incremental variable dividends on top of the 50%, I think those are all things we'll talk about here over the next, call it, 3 months and would expect to give you all more color as we move through the year.

Operator

Operator

Your next question is from Matthew Portillo with TPH.

MatthewPortillo

Analyst · TPH

This one might be for Clay. Just wondering if you could talk about some of the strong results you're seeing in the Bone Spring around Stateline and how that may impact your future inventory and development plans going forward?

ClayGaspar

Analyst · TPH

Yes. Thanks for the question, Matt. It's really exciting. So we -- the original acquisition was based on really the Wolfcamp A. We knew there was additional upside, but really pending the acquisition economics and the forward plan, it was really on kind of that Greater or Upper Wolfcamp landing zones. And that's been amazing. The homerun is really where you get these additional landing zones essentially for free, right? And that's what was so intriguing about the original entry into the Delaware. And as I mentioned in my prepared remarks, just the continued dividends that are paid from it. So we there was opportunity in the second Bone. We had drilled some early wells. But as we've refined the petrophysics and really dialed into the proper landing zones, we've been very encouraged, at least 3, maybe 4 landing zones in the Bone Spring. And the real questions have been and what we've been working on is proper spacing come laterally, but also in a vertical sense. How much of this is in hydraulic communication. And we're starting to kind of nail that down, and now you're starting to see us move into the development mode, which is just significant upside on that -- the incredibly rich infrastructure right there. And I talk about infrastructure, it's everything from owning the electrical infrastructure, water disposal system, our partnership with Howard Energy to relever all of those benefits. And then also recall that we purchased 15,000 surface acres over this whole area. And so again, as we continue to rediscover refined new opportunities kind of little exploration under our own feet, this is some of the most accretive value creation for the organization, without question.

MatthewPortillo

Analyst · TPH

That's great. And then maybe just another follow-up on the operational side. The WPX team was working to widen spacing designs in parts of the Delaware before the merger with Devon. I guess, with both of the teams now combined, could you talk about what you've learned so far from a completion and spacing optimization perspective and how that might influence your results moving forward?

ClayGaspar

Analyst · TPH

Yes. This is one of the kind of the hidden wins of what we talk about synergies. We can put a number on so many things, and we've ascribed this $600 million, which, by the way, I feel very confident in achieving by year-end. But I think these are the kind of things that are synergistic in nature. You've got 2 really, really smart teams that have been trying to solve this problem independently now have the opportunity to really learn together, share data, share resources, share lessons learned, wins, losses along the way, and it really kind of supercharges that. So I don't know that we've moved dramatically in any one area around spacing, but I think what's really interesting is to watch the continued improvement on the cost side of the equation. We're drilling wells in 12 days, 2-mile laterals in some pretty challenging areas. That's phenomenal. That adds incredible efficiency on the front end of the economics. The capital and the design associated with the completion is really where these wells will start to separate, and that's well placement stimulation design and all of those attributes that go in. We're testing -- we're turning a lot of knobs in that space. Too early to call on kind of what is the go-forward consistent plan across the whole Delaware Basin. My intuition will tell me that it's multiple go-forward plans in different areas. We'll continue to learn. We're looking at a lot of new technologies, and at the same time, continuing to get better from an ESG front. And I can tell you that's another one of the hidden wins from synergies, we're making great strides on that. And I think it's a very much a beneficial symbiotic relationship there as well.

Operator

Operator

Your next question is from Neal Dingmann with Truist Securities.

NealDingmann

Analyst · Truist Securities

Two questions that's kind of both been asked, I want to ask in different ways. Maybe, Rick, first for you, just first question is maybe on free cash flow allocation. I guess my question around that is, obviously, you're doing a great job on the variable dividend than the first out of the gate. But I'm just wondering, one, do you think you're being appropriately rewarded for that variable and just the total bills in general? And to me, kind of combined with that, what appears to be your stock trading at a discount to NAV, maybe why not do some more buybacks near term given that discount?

RickMuncrief

Analyst · Truist Securities

Yes, Neal, that's a question that we all debate here internally. And I'm not convinced that we've seen that yet. I think there's a question around the variable dividend about consistency, and you get quarter after quarter of some really nice dividends. I'm encouraged by the actions of our -- some of our other industry peers. And I think what you're going to find is that now Devon is not just being treated as a one-off, it's truly a movement within our sector of getting more cash back to shareholders. And I think that's a good thing. So when you look at it from that perspective, I think we will start seeing better equity performance. But if not, certainly, the discussion we had about share repurchases really comes to light and it's great to have optionality. So you heard Jeff a while ago talk about the ability to ratchet up the variable dividend with the stronger cash flows, we also would -- from an opportunistic standpoint, have the ability to certainly repurchase the equity. And the third thing, I think that when we think about capital allocation, it's a little more longer term. But we don't have any near-term debt maturities. We do have a couple of hundred million due, I think, here in 2023. But we have an incremental $800 million of callable debt in the next 24 months. And so we have options. And Neal, that's what I love about our portfolio, our strategy, the optionality, strong balance sheet. All that is going to, I think, really make for an exciting story over the next few years and something I'm very, very pleased with how it's come together with the merger. So I think suffice to say, if we don't see the equity performing to the level that we feel it should be, it's going to be a really good discussion with our Board. And I think they'd be very supportive of us pursuing opportunistic share repurchases.

NealDingmann

Analyst · Truist Securities

ClayGaspar

Analyst · Truist Securities

Operator

Operator

Your next question is from David Heikkinen with Pickering Energy Partners.

DavidHeikkinen

Analyst · Pickering Energy Partners

JeffRitenour

Analyst · Pickering Energy Partners

Thanks. I appreciate the question. I think it was very important to us not to just set a very long-range target and say, trust us, we'll get there. So we said intermediate kind of ranges goals as well. And so we have intermediate steps around 2025 and 2030 that are peppered throughout the document. And I can tell you we're well on our way. I mean just to point to some of the areas I think about one of the most important is around greenhouse gas emissions. And I think of the Southern Delaware, which is the legacy WPX asset, we were about 5% a couple of years ago. We averaged about 2.5% last year. State-of-the-art today, last probably quarter, we are somewhere between 1% and 1.5%. And so that's very encouraging. There's a lot of meat on that bone, because when you compare it to the legacy Devon asset, just across the border, they've been running about 0.5%. And so we see line of sight to where that Southern Delaware needs to go. We just need to do a little bit more work on some of the infrastructure, some of the cultural mindset about how we flow back what we're going to do, flow back and build the infrastructure and how we manage the wells themselves. I think about the other areas, both South Texas and Mid-Continent are phenomenal in that regard. Powder is a little bit more challenged. The big challenge is the Williston. And for all the Williston players, you hear the same story. It is a real challenging infrastructure asset. That has continued to be the case. I can tell you we are pushing really, really hard on that. We've dropped the emissions by about 1/3 over the last year, but it's still nothing to brag about, okay? It's still about a 10% number, which we need to continually improve on. We're investing in that. We're leveraging all of the relationships we have to continue to drive that down. And we will achieve our '25 and '30 targets as we've set out, but there's a lot of work to do between now and then.

Operator

Operator

Your next question is from Paul Cheng with Scotiabank.

PaulCheng

Analyst · Scotiabank

JeffRitenour

Analyst · Scotiabank

PaulCheng

Analyst · Scotiabank

For $70 of oil prices, Jeff, that when -- in terms of the cash tax paying, if that trajectory has been changed from what you have said in the past?

JeffRitenour

Analyst · Scotiabank

Yes, Paul okay. I'm with you. Yes, really short answer is no material change from what we talked about on the previous call. If you'll recall, what we -- current projection, we think we'll enter into next year with probably over $3 billion of federal NOLs. So that puts us in a pretty good position to shield ourselves from taxes in the near term. Obviously, price deck is, as you highlighted in your question, can have a material impact to that. Our current expectation, though, given the NOL position that we have and our current projections, even at these higher prices, we really don't expect to be a material cash taxpayer for a number of years. So again, that's going to be consistent with what we talked about in the past and no material changes there. Obviously, one of the things that we're evaluating and thinking about in the broader macro specific to the tax -- our specific tax position, and then just more broadly is any changes that the administration may make as it relates to IDC or any of the other specifics around how we would calculate our tax position. Again, no new news on that front. We've not gotten any better clarity as to the direction of the administration where they may head on that front. But we've certainly been running the sensitivities and evaluating the potential outcomes. Again, given our tax attributes today, we really feel like we're in a good spot and don't expect taxes to be a detrimental impact to our free cash flow story for a number of years.

ClayGaspar

Analyst · Scotiabank

Yes, Paul, I'll pick up. This is Clay on the inflation question. Was there something else first?

PaulCheng

Analyst · Scotiabank

Yes. And then how about the earnout accounting, given your commodity prices that you should be able to get some money from the earnout?

JeffRitenour

Analyst · Scotiabank

Paul, I think you're asking about the contingent payments specific to our Barnett transaction? Yes, absolutely. So we -- the one item you probably saw in the quarter as we adjusted our expectation there, given the higher prices. And so as we look at -- again, this is -- I'm going to use the forward strip as the baseline here. But as we look at 2022 -- or excuse me, 2021 in the results and the prices that we've seen to date, we would expect to receive a contingent payment on our Barnett transaction. It could be in the ballpark of $40 million. So that would be incremental cash that would be coming in the door to us as a result of that transaction.

PaulCheng

Analyst · Scotiabank

And does you have any P&L impact?

JeffRitenour

Analyst · Scotiabank

P&L impact? Yes. No, we've adjusted that contingent payment in our results for the second quarter, so you shouldn't see a big impact going forward.

ClayGaspar

Analyst · Scotiabank

And Paul, it's Clay. I'll pick up on your original question 2 around inflation. My belief is inflation is real. I appreciate the Fed Chairman saying there's some transitory things happening in the macro sense. But I think you go anywhere, talk to any business owner, and there is -- there are struggles to get employees and things working, even trying to buy relatively routine thing. So I think there's one level of inflation kind of in a macro sense. And then specific to our industry, higher commodity price obviously is driving some increase in activity. The question I have, and I think is still yet to prove out is the historical correlation between commodity price and rig activity is disconnected. And that's a good thing from the sense of our industry discipline. And so I think what we need to do is not necessarily focus on the commodity price, but it's more of the resulting activity. Certainly, some of the private folks have picked up more rigs differentially relative to the larger publics. I think as the larger publics continue to hold the line on disciplined cash flow returning sustainability in that regard, I think we'll continue to see moderate growth on activity. So what that means to us is summing those 2 things up, certainly, we will see some inflation. We're seeing it now. We have certainly baked that into our '21 expectations guidance. I have a lot of confidence in, again, being able to meet our guidance for the balance of the year. As we start to look forward and really trying to hone in on '22, I think there's still some questions out there. Clearly, we expect to see some inflation. I'm not ready to prepare and put a number on to it today. We're just starting our really deep conversations in a long-term sense with the Board as we work through capital investment levels, some of the things we've talked about on this call and certainly an incredibly important part of that math is inflation. So we see it coming. We're prepared for it. We're working to mitigate as best we can. We believe our relationships and the partnership that we can offer from a very consistent and robust program with a company that does what it says it's going to do, I think, offers a lot of value to our service company partners. And end of the day, we will see some higher costs, but not prepared to really point to a number just yet.

Operator

Operator

Your next question is from Scott Hanold with RBC Capital Markets.

ScottHanold

Analyst · RBC Capital Markets

RickMuncrief

Analyst · RBC Capital Markets

Yes, Scott, one thing -- this is Rick. One thing that we constantly try to keep a pulse on and that is investor preferences. And that's not always easy. Depends on who you ask sometimes. And so from our perspective, we think a balanced approach is a pretty good way to look at it. And you may be a little cross-threaded 1 quarter or 2 quarters, but over time, we think that's the best way to do it. And that's why you heard us talk about optionality. I think more near term, I think the higher dividends show me the money now has been, I think, the lion's share of the feedback that we've been hearing from shareholders. And I think that as we look at our shareholder group, we think that it's continued to strengthen as we're getting really some nice shareholders across the line, and really pleased with that. Now I think you'll also hear over time, maybe more comments and more perspectives on a little longer term approach. And I think that's an outcome of maybe some more stability in some commodity prices. And when I think commodity prices, I'm thinking about not only crude oil, which drives most of our revenues, but I can tell you, NGLs are -- we have some really, really nice exposure to the NGLs from basically all three of our basins, nice place to be. And so that -- if you get into a situation where even with your best efforts of getting cash back to shareholders, significant amount of cash to shareholders, if you still think you're being not rewarded properly with your equity performance, that really sets you up for some opportunistic share repurchases. And that's something that even though there were a 20% growth next year on the…

ScottHanold

Analyst · RBC Capital Markets

Yes. No, it's very appreciated. And just a quick last question here. Clay, I think you kind of alluded to this already, but obviously, with your greater efficiencies and you guys continue to outperform, I guess, even your expectation on your quarterly production guidance and look on pace to be there for the full year. It doesn't sound at least like this year, you're going to probably taper activity much. Is that sort of the concept that we should think about as we think about 2022, if you guys are still running a little bit more efficient. You're going to kind of maintain that activity and maybe grow into that 5%, I guess, kind of cap rate that you have out there?

ClayGaspar

Analyst · RBC Capital Markets

Scott Coody

Analyst · RBC Capital Markets

All right. Looks like we're at the end of our time slot today. We appreciate everyone's interest in Devon. And if you have any further questions, please don't hesitate to reach out to the Investor Relations team at any time. Have a good day.

Operator

Operator

This concludes today's conference call. Thank you.