Devon Energy (DVN) Update - Sept 1

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Note form RBC Capital Research rec'd 9-1-2021. Their price target for DVN is $35.

August 31, 2021
Devon Energy Corporation
CEO Fireside Chat: The Evolving E&P Strategy

Our view: We hosted a fireside chat with Rick Muncrief, DVN's President
& CEO, as part of RBC's Back-to-School Energy Seminar. The discussion
focused on the evolving FCF/shareholder return strategy occurring in the
E&P sector. Management is committed to its disciplined approach on
growth and sees a line of sight on a 20% increase to CFPS in 2022.

• Management has seen more inbound investor interest and thinks
that will continue as more industry peers demonstrate discipline and
shareholder returns over the coming quarters. DVN believes the E&P
industry needs to show a 50-100% premium yield to the S&P500 to
be attractive given commodity price exposure. Management highlighted
that it sees a 20% increase in CFPS in 2022 at maintenance production
levels. We expect DVN at 10+% total dividend yield in 2022.

• Fixed and variable dividend increases are favored over share
repurchases. Historically, commodity and stock price volatility make
share repurchase programs tough, but an opportunistic repurchase
program remains a consideration. It appears the next use for incremental
excess FCF is to increase its fixed dividend.

• The company could also contemplate an increase to the variable dividend
payout, but it likes the 50% payout ceiling at this time. There is an
advantage to increasing the fixed dividend as it more broadly "screens"
better for investors. Stock repurchases are a third outlet for excess FCF
but are likely more opportunistic. The company highlighted that the
majority of investors favor dividends over buybacks.

• Consolidation continues to make sense but must fall within its disciplined
returns and accretion framework. The value proposition needs to be clear
and convincingly makes the company stronger.

• DVN historically favored more programmatic hedging and is comfortable
at this point. The company likely targets approximately one-third
volumes hedged, which is a bit less than it has done in the past but this
should provide enough protection and plenty of upside optionality to
commodity prices.

• The Permian is getting 80% of capital investment and it seems like that
will continue. The returns in the STACK are attractive and bolstered by its
JV. However, even with much stronger natural gas and NGL prices, it is
tough to compete with Permian returns. The company likely remains at
a two-rig pace in the STACK but could evaluate a third at some point.

• Other areas like the Bakken and Eagleford are FCF engines that don't
require as much capital at this point.

• DVN has well-established ESG goals and puts a lot of focus on all aspects.
The company has a small group that is looking at future opportunities
such as carbon capture, but it will be thoughtful in its approach into these
projects. DVN has a solar project in the Permian where it has a 15,000-
acre surface ownership.