Key Takeaways From Devon Energy's Earnings Report

| About: Devon Energy (DVN)

Devon Energy Corporation (NYSE:DVN) reported a net loss of $1.3 billion, or $3.34 per share for the first quarter of this year. The loss was a result of a $1.9 billion non-cash asset-impairment related to lower oil and natural gas liquids pricing. Outside of that charge, the company earned $270 million or 66 cents per share for the quarter.

Key takeaways from this report are:

  • Total production exceeds company guidance.

  • Permian Basin drives 23 percent year-over-year growth in U.S. oil production.

  • Company-wide oil production averaged 162,000 barrels per day, a 14 percent increase compared to the first quarter of 2012 and an 8 percent increase over the fourth quarter of 2012. Driven by the Permian Basin, the most significant growth came from the company's U.S. operations, where oil production increased 23 percent year over year.

  • Total production of oil, natural gas and natural gas liquids increased to an average of 687,000 oil-equivalent barrels [BOE] per day in the first quarter. This exceeded the top end of the company's guidance by 2,000 barrels per day.

  • Oil and liquids production, our highest margin products, now account for 41 percent of our total production, said John Richels, president and chief executive officer. Driven by our success in the Permian, we are on track to grow our U.S. oil production by almost 40 percent in 2013.

Devon now has hedges in place on natural gas (NYSEARCA:UNG). This is one strategy that I disagree with the company as I think natural gas pricing will be closer to $5 by the end of the year.

The recent rise in natural gas pricing has provided Devon the opportunity to increase its natural gas hedging position. For the remaining three quarters of 2013, the company has protected 1.7 billion cubic feet per day, representing approximately 75 percent of its expected natural gas production. Of this total, 1.0 billion cubic feet per day is swapped at a weighted average price of $4.09 per thousand cubic feet. The remaining 0.7 billion cubic feet per day utilize costless collars with a weighted average ceiling of $4.19 per thousand cubic feet and a floor of $3.55 per thousand cubic feet. In 2014, Devon now has 900 million cubic feet per day of production locked in at a weighted average floor price of $4.34.

Even with the hedges in place, it will greatly benefit the company. According to John Richels President & CEO:

The recent uplift in natural gas prices could have a significant impact on our financial results in upcoming quarters. While the improved sentiment around gas prices is certainly encouraging, we're not modifying our 2013 capital plans at this time. Even with our natural gas assets being located across some of the lowest cost shale plays in North America, returns continue to be more attractive on the oil and liquids rich side of our portfolio versus dry gas drilling.

Outlook Going Forward

One of the main things I like about Devon is that the company has successfully made the transition to its production having a higher value oil-weighting. The company has been having great success in the Permian Basin and that has increased year-over-year 23%. According to John Richels,

We have for instance right now about 20 wells and we've been bringing on or currently bringing online within the Permian and so we're going to be significantly ramping up our production in the second, third and fourth quarter. You saw in the quarter we drilled 19 wells, only completed four, so we're working our way through that backlog right now, and that's what's going to really drive the Permian oil growth. We've reviewed it and we're very confident on that growth throughout the year.

The company's balance sheet is in great shape with $6.5 billion cash on hand. In the first quarter, Devon's exploration and development budget was $1.5 billion focusing on oil and oil liquids. Twenty-nine rigs were operating in the Permian Basin where Devon has 1.3 million net acres. More wells will be coming online in the second quarter from this increased drilling activity.

Devon also has promising opportunities with its 600,000 net-acreage in the Mississippian to north central Oklahoma. Twenty-four wells were brought online in the first quarter and the company now has 53 wells operating. According to Dave Hager EVP Exploration & Production,

Strong results from the Mississippian trend confirm our belief that this area will provide the next leg of large-scale - large scale highly economic oil growth for Devon. Our 2013 capital program is off to a great start. With solid production results in our cornerstone areas and a significant inventory of emerging oil opportunities, we are poised to deliver solid oil and liquids growth in 2013 and beyond.

Devon has increased the company's dividend in March by 10% and this marks the eighth increase since 2004. Another gift to Devon shareholders could be a midstream MLP. According to President & CEO John Richels,

One option being evaluated is the creation of a midstream master limited partnership. We're nearing our - the completion of our evaluation and we expect to reach a final go/no-go decision before the end of this quarter.


Of the analysts that follow the stock, eight have it rated as a Strong Buy, nine a Buy, and 12 a Hold. Price targets on the stock range from $55 to $90 with $70 being the median target. I like how Devon is positioned in the energy space and like the idea of an MLP spin-off. Devon also has strengthened its financials and I can see the company doing a stock buyback or increasing the dividend. I have Devon Energy as one of my 5 Natural Gas Stocks To Own.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.