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Summary

  • Devon announces a sharp increase in profits and sales.
  • Acquisition of Eagle Ford drives production, growth potential, earnings and appeal.
  • Valuation remains still appealing, I am a buyer on dips.

Devon Energy (NYSE:DVN) released its first quarter results and issued a big investor presentation over the past week, outlining the current developments and its future strategic developments which it makes to create long term shareholder value.

First Quarter Headlines

Devon Energy announced first quarter revenues of $3.72 billion, up nearly 89% compared to last year. The company reported GAAP earnings of $324 million, or $0.79 per share which compares to a big $1.34 billion loss last year.

Last year's results were severely impacted by a $1.91 billion pre-tax impairment charge, but underlying profits have been very strong this quarter. Adjusted earnings came in at $547 million, more than doubling compared to the year before.

First quarter oil-equivalent production came in at 691,000 barrels. The core assets produced 563,000 barrels which is up by 7% compared to last year, with the vast majority of non-core assets producing natural gas. As such, divestitures of these assets will have only a modest impact on reported revenues and earnings.

Investor Presentation

After earlier releasing its first quarter results, Devon Energy gave an investor presentation as well over the past week outlining its current performance, strategy and future outlook.

Devon stresses the 2.6 billion in barrels of oil-equivalent in reserves located in core holdings like the Anadarko Basin, the Permian Basin, Eagle Ford as well as the Barnett Shale. Emerging plays are the oil fields in the Rockies and the Mississippian-Woodford.

Oil and NGL already make up more than half of total production which rose sharply. First quarter US oil production of 97,500 barrels per day was up 56% on the year despite only one month contribution from the acquired Eagle Ford assets. This production was accompanied by a 54% growth in operating margins to little over $32 per barrel.

The acquired Eagle Ford operations produced 49,000 BOE in March, with production expected to more than double to over 100,000 BOE by 2015. Earlier this year, Devon completed the $6 billion acquisition, thereby acquiring 82,000 net acres from GeoSouthern Energy.

Total 2014 US oil production is seen between 124 and 136,000 barrels this year, while total production is seen between 198 and 216,000 barrels. This is expected to grow by at least another 20% in 2015.

Divesting Non-Core Assets

Devon sold its Canadian conventional business for $3.125 billion Canadian dollar earlier, resulting in net proceeds of $2.7 billion. The deal valued the assets at 7 times EBITDA. The assets which largely produce natural gas were sold to Canadian Natural Resources.

Other non-core assets which are currently for sale are the Rockies, the Gulf Coast and the mid-Continent assets.

Investing In The Future

For 2014 Devon will invest between $5.0 and $5.4 billion, notably in the Permian Basin, The Eagle Ford and Heavy Oil. These investments are made to accelerate the development in high-margin projects, while at the same time Devon remains committed to contain and reduce debt while repurchasing shares and increasing its dividend.

Valuation

At the first quarter earnings presentation Devon reported a balance sheet holding $2.1 billion in cash and $15.4 billion in debt. Following the Canadian divestment its net debt position will have shrunk to $9 billion.

At the same time, Devon managed to reduce its outstanding share base over the past years, while paying out a moderate dividend of $0.24 per share on a quarterly basis, providing investors with a 1.4% dividend yield.

At this pace annual revenues of more than $15 billion should be attainable while adjusted earnings could come in anywhere between $2 and $2.5 billion in my opinion.

At $71 per share, Devon Energy is valued at close to $29 billion. This would value equity in the firm at around 2 times annual revenues and 13 times adjusted earnings.

Takeaway For Investors

Devon is making similar strategic moves like all of its competitors. It is selling non-core assets, foreign assets and is shifting production from natural gas to higher yielding oil properties.

The company made recent transformational moves as well selling its Canadian properties in order to acquire the Eagle Ford assets. These are expected to report significant growth going ahead.

These moves allow for future production growth in politically stable areas in very lucrative production areas. While the debt position is a bit on the high side, the leverage is not a big issue thanks to production hedges and strong operational cash flows. On top of this, sales of other non-core assets could allow for a further reduction in leverage.

I still like the stock a lot, but shares have already risen some 15% year to date, making me a buyer on dips.

Source: Devon Energy - Transformation Efforts Continue To Pay Off