Resuming Coverage at In Line

Research evidence excerpt

Resuming Coverage at In Line

~3.7x… a full ~1.0x discount to peers

despite enhanced scale, inventory, and a clean balance sheet.

DVN's execution on legacy business optimization materially de-risks the underwriting of

incremental CTRA synergies. Since the April 2025 biz optimization announcement, legacy

management has consistently pulled forward the $1 billion pre-tax cash flow improvement

program, moving from an initial 30% capture target in 2025 to announcing 60% captured by

November, and ultimately capturing 85% by YE25; DVN now expects a full 100% run-rate

captured by 2Q26… with savings spanning capital efficiency (~$300 million, anchored by 22%

faster drilling and Simulfrac scaling above 70% in 2026), production optimization (45 MBoed

incremental, with LOE+GP&T down ~6% per unit), $200 million of Delaware commercial savings,

and $50 million+ of corporate/interest reductions. This track record supports the CTRA deal's

incremental $1 billion run-rate target by YE27 (PV-10 ~20% of pro forma market cap), split across

capital ($350 million), operating margins ($350 million), and corporate costs ($300 million). Our

base case forecast underwrites 90% of these synergies in our forecast (~$370 million in 2027,

~$525 million in 2028).

Pro forma scale, balance sheet, and cash costs screen competitive with EOG and FANG, though

wider Rockies oil differentials (~$4.50/bbl) weigh on cash flow conversion. This remains true

even after normalizing for differences in oil mix and measuring cash flow per barrel against

straight weighted benchmark price to account for differences in how each team allocates costs

(i.e. what gets rolled into the differential versus the cash unit costs lines in the income statement).

See page 6 below for detailed comparison.