Devon Energy outperformed expectations by every metric in the second quarter, prompting the firm to look ahead toward further optimization and tax credit benefits during a second-quarter earnings call with investors on Aug. 6.
Production during the April through June period exceeded the top end of guidance, driven by operations in the Delaware Basin and strong performance across Devon’s other assets, said CEO Clay Gaspar.
Spending for the period came in 7% below guidance. The performance generated free cash flow (FCF) of $589 million. Some 70% of the FCF was returned to shareholders via dividends and share repurchases.
Operational enhancements that leveraged design improvements, simul-frac implementation and “relentless focus on safety and execution provided a 14% year-over-year improvement on drilling costs and a 15% improvement in completion costs.
“These are not just one-time gains,” Gaspar said. “They reflect the ongoing commitment of our teams to drive meaningful, long-term improvements in how we operate.”
Devon has in total reduced its 2025 capital spending guidance by 10%, roughly $400 million.
“This outcome is a direct result of disciplined capital allocation, ongoing operational improvements, and importantly, our commitment to leveraging technology across the business,” Gaspar said. “Our proprietary AI tools, agents and models are embedded throughout our operations from drilling and completions to real-time production optimization.”
Outperformance
The firm’s disciplined spending resulted in a 7% outperformance versus expectations, a 5% improvement in production cost from the prior period due to reduced downtime, lower workover expenses and lower production taxes, said CFO Jeff Ritenour.
During the second quarter of 2025, Devon sold its investment in Matterhorn for $372 million and recognized a pre-tax gain of $307 million ($239 million, net of tax), which was recorded to asset dispositions on the accompanying consolidated statements of comprehensive earnings.
“With this robust cash generation, we delivered significant value to shareholders, paying $156 million in dividends and allocating $249 million to share repurchases,” Ritenour said. “We remain firmly committed to our capital allocation framework, balancing high return investments with substantial cash returns to shareholders.”
Midstream management
Devon has acquired all outstanding non-controlling interest in Cotton Draw midstream assets for $260 million earlier this year.
The deal strengthened Devon’s position in the basin, Ritenour said.
“This transaction gives us 100% ownership of the asset and full access to its cash flows, resulting in savings of over $50 million in projected annual distributions that would have been paid to our partner,” Ritenour said. “These savings are incremental to our $1 billion business optimization plan announced earlier in the year, further improving our multi-year cash inflows.”
Coupled with the closing of the Matterhorn pipeline divestiture, the Cotton Draw acquisition “demonstrates our commitment to creating value and enhancing our E&P operations through our strategic midstream investments.”
“With these transactions, we've successfully created value as both a buyer and seller of midstream assets.”
Ritenour said the firm remains open to additional opportunities in the midstream space that will create further value.
Going forward
Devon is reducing capex by $100 million in the third quarter. About $75 million of the total is a direct result of business optimization efforts; the remaining $25 million comes from deflationary pressures. The edit brings total capital guidance to a range between $3.6 billion and $3.8 billion.
“Importantly, our breakeven funding level remains highly competitive at less than $45 WTI, including the dividend,” Ritenour said. “At today's strip pricing, this positions us to generate approximately $3 billion in free cash flow for the year, underscoring the resilience and flexibility of our business model.”
The recently passed One Big Beautiful Bill Act holds meaningful tax benefits for Devon, Ritenour said. The changes are expected to enhance FCF this year, and while the tax rate may be somewhat volatile during the next few quarters, he said the firm anticipates a tax rate of 10%, down from the previous estimate of 15% and adding almost $300 million to projected cash flow for 2025.
“As a result, we anticipate our ongoing current tax rate will be significantly lower than previous estimates, ranging between 5% and 10%. This reduction will provide Devon with increased cash flow of approximately $1 billion over the next 3 years, assuming a similar pricing environment and capital spend,” he said. “This is in addition to the $1 billion of incremental free cash flow from our business optimization plan.”
In four months, Ritenour said the firm has reached 40% of that $1 billion optimization goal.
