There and Back Again: Rick Muncrief and Devon Energy’s Permian Journey
A child of the Permian Basin, Rick Muncrief long knew the potential of the basin’s now-booming western lobe.
Muncrief methodically, but rapidly, built up WPX Energy Inc. through West Texas and New Mexico’s liquids-rich Delaware Basin after he took over in 2014. Now, he remains focused on the Delaware as the jewel of a multibasin portfolio after WPX combined with Oklahoma City rival Devon Energy Corp. in a $5.75 billion, so-called merger of equals.
"It’s driven by the geology and the amount of raw resources in the Delaware,” Muncrief told Hart Energy. “The Permian is a place we’re very, very comfortable with and very, very proud of."
Muncrief promotes a bold and decisive acquisition approach while still holding dear to strategic and conservative fiscal values. He positioned WPX in the Delaware—while divesting in gassy, noncore areas—and is now further diversifying the merged Devon Energy he took over in the Williston and Eagle Ford shale plays through the recent acquisitions of RimRock Oil & Gas and Validus Energy, respectively.
That intrepid attitude proved imperative in 2020 when Devon and WPX took action in an industry that initially halted all dealmaking during the pandemic.
“During the pandemic, we felt like everyone was on their back heels. They were afraid to make a move,” Muncrief said. “At Devon and WPX, we felt like there were things that each of us needed. For WPX, we needed a little more scale and inventory. Devon was concerned about a lot of exposure to federal lands. At WPX, we didn’t have as much. That’s where it was truly a win-win.”
“The Permian is a place we’re very, very comfortable with and very, very proud of.” - Rick Muncrief, Devon Energy
Now, the combined Devon estimates its fourth-quarter production at about 650,000 boe/d with roughly 65% of the volumes hailing from the Delaware. But the barrels were well more than 70% weighted toward the Delaware before the recent RimRock and Validus deals.
Gabriele Sorbara, managing director of equity research at Siebert Williams Shank & Co., said acquisitions are not the red flags for investors that they were just before and during the pandemic. Companies need to build drilling inventory and they should if they have strong free cash flow like Devon.
“M&A isn’t the risk it used to be. M&A is good if you’ve got the cash and you can get the deal done,” Sorbara said. “If there’s an opportunity, Devon is taking it. It’s really important to have scale and use that cash in a productive way. We’re going to continue to see consolidation across the basins.”
Born in Ardmore, Okla., Muncrief moved to Odessa, Texas, in 1958—before he was old enough to remember—after his father started working in the Permian for El Paso Natural Gas.
They would later live in the Delaware Basin in Hobbs and Jal, N.M.
At the time, U.S. oil production remained on a steady rise. But, at a domestic total of 7.1 MMbbl/d in 1957, the Permian still did not come near today’s record high of 5.5 MMbbl/d, which is 45% of the nation’s daily production.
“It’s been a foundational basin for the U.S. energy picture,” Muncrief said of the Permian.
And he is thrilled his father is still alive to see the growth today.
“He can’t believe the size of the facilities being built and the amount of gas and crude oil coming out of the Permian. The activity levels and efficiencies are what you really point to,” Muncrief said. “I took him out to a field three or four years ago and he was just amazed. There’s a lot of the same country, but just a lot more activity.”
Stationed at Devon’s headquarters in Oklahoma City today, Muncrief left the Permian to graduate from high school in Oklahoma and to attend Oklahoma State University, where he naturally majored in petroleum engineering technology.
Among other stops, Muncrief loosely followed his father’s legacy, working his way up at El Paso, its acquirer, Burlington, and then ConocoPhillips Co., which ultimately swallowed up Burlington. In 2009, he eventually took over as senior vice president of operations and resource development at Harold Hamm’s Continental Resources Inc.
And then his big break came in 2014, when a struggling WPX Energy appointed him CEO.
Aiming for the Delaware
WPX spun off from midstream operator Williams Cos. at the end of 2011 so it could concentrate on exploration and production.
The company promptly struggled with a lack of crude oil exposure and challenging natural gas prices.
At the time, WPX’s gas-weighted portfolio was only 20% liquids. Muncrief was hired to transform the company.
“We were in seven different basins at that time. The Permian was not one of those,” Muncrief said dryly.
In mid-2015, after oil prices had plunged, WPX made its first move to buy privately held RKI Exploration & Production for $2.35 billion because of its 92,000 acres in the Delaware in Texas’ Loving County and New Mexico’s Eddy County.
“At that point in time, the Delaware was really struggling. It was much more of a challenging area to drill and operate in than say the Midland side of the Permian,” Muncrief said. “I think, for us, we went to the geology. That’s the thing that really took us to the Delaware Basin. There was a fair amount of development going on, but we felt there were at least another two or three levels of efficiencies and capabilities that we would see in the Delaware.”
Five years later, it turned out that the RKI deal made the Devon merger more practical. Much of RKI’s acreage bordered Devon’s position.
“That’s why ultimately down the road the merger made so much sense with the adjacency to the two companies’ acreage positions,” Muncrief said.
But Muncrief and WPX did not stop there.
In a recovering, but still-struggling industry in early 2017, WPX scooped up the Delaware assets of Panther Energy and Carrier Energy.
Then, in late 2019, just prior to the pandemic, WPX paid $2.5 billion to buy out privately held Felix Energy and its large Delaware position.
Eventually, WPX’s seven basins—without a Permian footprint—turned into two with a big Delaware position and a solid Williston play.
As WPX was growing in the Delaware, Neal Dingmann, Truist Securities energy analyst, said Muncrief was able to successfully pivot WPX to become a leader in shareholder returns at a time when investors were finally forcing producers to practice discipline.
“He’s a very disciplined CEO,” Dingmann said. “The top leaders are great operators and they understand Wall Street—that’s a tough combination. Rick kind of checks all those boxes.”
Devon was not as analytical with its strategies before Muncrief took over, sometimes following the trends set by its peers.
And, in the years that WPX was growing in the Delaware, Devon was mostly focused on divesting, with some big buys mixed in between sales.
In Devon’s world
After making a big, expensive buy in the Eagle Ford Shale i
n 2013 amid high crude prices, Devon largely focused on asset sales, with some notable exceptions.
In 2014, Devon sold its noncore portfolio to now-defunct Linn Energy and used the proceeds to buy Oklahoma STACK acreage from Felix.
Then, over three years, Devon sold its Canadian upstream and midstream assets and its noncore Midland Basin acreage.
In 2020, and shortly before the WPX deal, Devon sold its shale pioneering Barnett Shale gas assets to BKV Corp., which is now planning to go public under the strength of those gassy acres and natural gas prices.
Muncrief joked that he asked the Devon team why they made the Barnett deal before he took over. But then he responded seriously.
“I’ve asked myself that same thing of some of the things WPX sold. But here’s the thing,” he said. “Those assets were sold at an attractive price but, more importantly, got you focused on and gave you cash to operate on some of your higher-margin and more profitable areas like the Delaware. There’s no regrets. You make those calls and take the proceeds and move on and reinvest them.”
Now, apart from the Delaware, Devon is positioned in the Anadarko Basin, the Williston, the Eagle Ford and the Powder River Basin. Those positions include newly acquired acreage from RimRock for $865 million cash in July and from Validus for $1.8 billion in cash in September.
“A multibasin, multicommodity business is the one that’s going to be successful over the long haul,” Muncrief said. “We all recognize the strength of our Delaware position, but there’s also opportunities in other basins, especially when you’re in the core of these basins like we are.”
And, as long as prices and free cash flows remain healthy, Devon will continue to eye potential growth moves. “We’ve always had a high bar,” he said. “We’ve been real disciplined in our moves, and I don’t think that’s going to change.”
Those types of bolt-on deals like RimRock and Validus in non-Delaware basins are critical for future growth, said David Harris, Devon’s executive vice president and chief corporate development officer, in an interview with Hart Energy. He noted that both deals bring oil-weighted acreage positions close to Devon’s existing footprints.
“Scale matters as we’ve moved into this new era of unconventional development, and we believe having really high-quality, low-breakeven assets in the premiere basins around the country is an important part of that,” Harris said. “We think being able to evaluate opportunities and places outside the Permian has given us the opportunity to find some unique value creation for our shareholders.”
Gabriele Sorbara said the Wall Street focus on single-basin companies is not as strong as before, especially since it is so hard to still buy into the heart of the Permian.
“I think we’re in a different world today. Back in the day, people wanted that pure-play focus. But I think multibasin is an advantage in this day and age,” Sorbara said. “I think about who’s got the ability to sustain and thrive longer term. Devon is there.”
Forward financial focus
Muncrief took over as CEO of the combined Devon in early 2021 and quickly made waves in early May by announcing a pioneering dividend strategy—a fixed-plus-variable dividend—that was quickly followed by others making similar moves, such as Pioneer Natural Resources Co. and ConocoPhillips.
The idea was to reward shareholders with a predictable fixed dividend and return more to investors on a quarterly basis when commodities prices are stronger—as has been the case through most of 2022.
“One of the things we heard from investors for a number of years is what do you do with those cash flows when they’re real strong,” Muncrief said. “We had a history of putting it to work at the drill bit. We saw an opportunity to change that model. That’s where Devon landed with the ability to pay a really nice fixed dividend, and the stronger cash flows allow for the variable dividend returning a substantial portion back to shareholders.”
When oil prices dipped in the fall, so did the third-quarter dividend—albeit predictably. But analysts and investors also saw rising capital spending, which is largely from inflation on services, and lower-than-expected production guidance. So the stock price fell a bit in November from recent highs.
“We’ve been real disciplined in our moves, and I don’t think that’s going to change.” - Rick Muncrief, Devon Energy
But the longer-term optimism remains strong, Sorbara said. “The guidance was a bit lower than expected and it raised some flags with investors. But Rick is a great leader. The assets are top notch. The whole industry has evolved and they’re pioneers. At some point, the industry will pivot toward growth and Devon is perfectly situated.”
Looking forward, Muncrief sees a company with strong productivity, free cash flow and shareholder returns. But the overall industry challenges of inflation and well productivity will remain. He sees production volumes relatively flat in 2023 with some modest upside while running close to 25 rigs.
“I think we’re doing a good job of fighting the impacts of inflation. You’re still going to see those capital numbers go up across the board,” he said. “I think we just need to stick to our guns. I think everyone is going to try to keep their volumes flat.”
Inflation is pushing the cost of wells up, but Devon is saving time and money through efficiencies by cutting down on the amount of days to drill and complete wells. “You’re saving 10% on time by doing it more quickly and efficiently,” he said. “We’ll see how it all plays out.”
Well productivity degradation is a real issue across the industry with companies drilling their best opportunities first, he said, but improving efficiencies and new exploration will help offset the weaknesses. That is the booming market scenario for the services sector with flat production requiring more activity, he said.
But do not confuse that realism for a lack of optimism. There is a reason Devon is only hedging 20% to 30% on crude production and even less on natural gas, he said. The global supply-and-demand outlook remains in Devon’s favor for some time, he said. And that brings him back to his emphasis on discipline.
“We just need to be disciplined and patient and keep the market supplied,” Muncrief said. “We do think there’s a supply tightness on the horizon. The U.S. SPR [Strategic Petroleum Reserve[ releases are just about over, and we don’t even have China really reopened yet. So we see bullish indicators.”