Devon Energy Corporation (DVN) is a leading independent energy company that is engaged in the exploration and development of natural gas liquids. For the first quarter of 2012, the company reported earnings per share of $1.05 per share against an EPS for the fiscal 2011 of $6 per share. First-quarter revenues of $2.5 billion were down more than 3% on a year on year basis and the revenues for the full year 2011 were $11.45 billion.
Gross margin at 66.4% was down, but operating margin at 28.4% - which was 1.5% better than the comparable quarter in the previous year. Net margin at 15.7% was down by 2.3%. Net earnings for the quarter were $393 million and cash flow generation was $1.4 billion, which is a 3% increase over the comparable quarter in the previous year. The strong showing for the quarter was partly due to the increased production of liquids for the sixth consecutive quarter at 256,000 Boe per day.
Devon is performing well and shareholders showed their appreciation for the company and its management with strong support for all the proposals of the company at its annual meeting. The company has gained a foothold in most of the significant gas plays in the US such as the Mississippian, the Utica, the Permian, and the Barnett as well as oil sands and liquid natural gas developments in Canada.
Within the United States, the company appears to be focusing on the Utica and the Cline. Devon estimates that each well drilled in the Cline formation, which is rich in oil and liquid gas, could produce 570,000 boe, with flow rates up to 600 boe per day in the first month, at a cost of $6.5 million per well. Devon estimates that each well drilled in the oil and liquid gas rich Cline formation could produce 570,000 boe, with flow rates up to 600 boe per day in the first month, at a cost of $6.5 million per well. In this respect, the company is ahead of its competitor Laredo Petroleum Holdings (LPI) because it already has 500,000 net acres over the Cline, on which it plans to drill 15 wells this year.
After a period of activity in Ohio on the Utica Shale, residents and regulators alike are beginning to move against the outburst of fracking with both regulation and litigation. New drilling rules for operators include full disclosure of chemicals used for fracking as well as the usage of water. A proposal to tax high producing wells still remains on the table for the future and should come as a relief to Devon - which has high producing assets. Meanwhile, Chesapeake (CHK) has announced that it is looking for a buyer for over 300,000 acres on the Utica and it is possible that Devon, which has the resources, may strike a favorable deal with Chesapeake.
While competitors such as Cabot Oil & Gas (COG), Comstock Resources (CRK), and Canadian Natural Resources (CNQ) are going ahead with new exploration plays, Devon continues to be in a strong position because of its discipline in holding on to its capital until it is time to spend on projects that are worthwhile. With rock bottom prices in natural gas, the company wisely continues to concentrate on opportunities in oil and natural gas liquids. It is focused on the North American continent in onshore areas ranging from the Canadian Arctic to the Gulf Coast.
Another major asset that Devon owns is the 13 million net acres that it holds, of which two-thirds has not been developed yet. One of the most prized regions for Devon is the Permian Basin in Texas and New Mexico, where it has currently deployed 21 rigs against Apache (APA) with 31 rigs in the basin and Concho Resources (CXO) with 37 rigs. Devon has also begun drilling for light oil in the Cline Shale, which is a part of the Permian Basin, and aims to produce 70,000 barrels of oil-equivalent a day by year 2015.
The company has sold off some of its offshore assets and some of the money raised has gone to repay some debt and to repurchase shares worth about $3.5 billion. It still has $7.1 billion in cash and equivalents to finance further capital expenditure. Among its promising new plays is the Niobrara Shale is in the Denver-Julesburg Basin stretching between Northeast Colorado, Northwest Kansas, Southwest Nebraska, and Southeast Wyoming and where Devon has acquired about 100,000 net acres in far Southeast Wyoming.
In addition, Devon is one of the largest natural gas producers in Montana where it has 1.2 million acres under lease and should be in a position to benefit when gas prices begin to recover. In addition, there are the Jackfish 1 and Jackfish 2 oil sands projects in Canada. This third Jackfish project is about half complete.
Devon was recently named among Fortune Magazine's World's Most Admired Companies list for the sixth year in the row. The magazine also noted that the company ranks Number 1 in the "mining/crude oil production" category for social responsibility. This is in all likelihood due to its efforts aimed at promoting CNG and LNG as alternative fuels for vehicles.
Despite all this, I would hesitate to recommend Devon as a buy at this particular point in time. I would look for favorable indications for future growth, such as a recovery in global oil demand or a recovery in North American gas prices before buying this stock. However, you should watch developments closely and hold your existing investment position until more favorable buying opportunities present themselves.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.