Devon Energy - Improving American Oil Producer

| About: Devon Energy (DVN)
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Summary

Devon Energy has had a difficult time since the start of the crash. Even with the company's recent price improvements, its stock price is still roughly half its pre-crash prices.

Devon has managed to increase the efficiency of its American shale portfolio significantly since the start of the crash. This has allowed the company's costs to go down significantly.

On top of this, the company anticipates that its cash flow will double from 2016 until 2018. This shows why Devon Energy is an impressive investment at the present time.

Devon Energy (NYSE: DVN) is an upstream natural gas and oil producer based out of North America. With a market cap of just under $25 billion, it is on the smaller side of major oil producers. At the same time, the company chose to cut its dividend as a result of the crash. Despite this, Devon Energy has been increasing its efficiency and has been improving its financial position. These things, as we will see, make the company an impressive investment at this time.

Introduction

Devon Energy is an independent natural gas and liquids producer headquartered in Oklahoma City, Oklahoma. The company is a part of the Fortune 500 and has several billion barrels in proven reserves. The vast majority of the company's reserves are in the United States, with the remainder of its reserves located in Canada. It is one of the larger producers in American shale with significant assets here.

(Devon Energy - Devon Energy Center)

Devon Energy has had a difficult time since the start of the oil crash. The stock price peaked in mid-2014 at just under $80 per share. From that point, the company saw its stock price drop by more than 75% to an early 2016 low of less than $20 per share. Since then, it has recovered respectively to a present stock price of just over $45 per share.

However, the stock price is still noticeably below its pre-crash levels, and the company still has significant recovery potential.

Devon Energy Today

Now that we have a small overview of the company along with an overview of its recent stock price performance, let's continue by discussing Devon Energy today.

(Devon Energy Key Messages - Devon Energy Investor Presentation)

Devon Energy is a leading American exploration and production company. However, it has a premier asset portfolio focused on North American shale. Currently, 45% of its production is oil, 38% is gas, and 17% is natural gas liquids, allowing the company to see best-in-class earnings results. However, on top of these impressive earnings, as we will see, Devon has continued to maintain impressive financial strength.

(Devon Energy Improvements - Devon Energy Investor Presentation)

At the same time, Devon Energy is focused on driving efficiencies across the portfolio. That means it is focused on increasing its earnings from the present assets rather than paying to find and explore new assets. By taking advantage of its existing assets, the company should be able to increase its capital productivity and earnings.

By taking advantage of its existing assets, Devon has put itself in a unique position for a recovery. The company is focused on value and returns on its capital assets and, as a result, it is well positioned for recovery. As oil prices go back up, Devon Energy will be able to bring additional wells on-line. This should help its earnings to grow.

However, even with these investments, Devon Energy is focused on maintaining an investment grade balance sheet. The company has been improving its financial position, and by maintaining an investment grade balance sheet, it should maintain a low cost of debt. This will keep Devon's interest expenses lower.

Devon Energy Efficiency Improvements

So far, we have an overview of Devon's recent stock price performance, along with an overview of the company today and its focus on efficiency in American shale production while improving its balance sheet. Now let's move on to quantifying Devon Energy's improvements on balance sheet efficiency.

(Devon Energy Cost Savings - Devon Energy Investor Presentation)

Since it peaked in mid-2015, Devon Energy has decreased its lease operating expenses, or cost of operating the wells and equipment on a producing lease, by an astounding 37%. This means the company's quarterly lease operating expenses have decreased from $572 million to just $355 million. The decline of these expenses means Devon Energy can continue producing the same profits at lower costs.

(Devon Energy Cost Reductions - Devon Energy Investor Presentation)

At the same time, on top of decreasing its expenses, Devon Energy has achieved consistent productivity gains. The company anticipate that its general and administrative savings will reach $0.4 billion in 2016, an impressive 44% improvement from early 2015. This decrease in costs, in line with what we saw above, shows how the company is maintaining production while saving significant amounts of capital.

At the same time, Devon's earnings per well have gone up significantly. The company's per well rates have increased by an astounding 250% since 2012, meaning its earnings have been increasing significantly. This is driven by the company's increased efficiency in its U.S. resources plays. These increased efficiencies should help Devon Energy's income go up significantly.

This shows how the company's efficiency is going up significantly. This combination of decreasing costs while increasing efficiency per well should help Devon Energy to handle a prolonged oil crash. This should also help the company's long-term earnings to increase as oil prices recover.

Devon Energy Future Outlook

So far, we have a detailed overview of Devon Energy's recent stock price performance, the company today, and its very significant efficiency improvements. Now let's move on to discussing its future outlook.

(Devon Energy 2017 and 2018 Plan - Devon Energy Investor Presentation)

Devon Energy anticipates 15-20 operated rigs in 2017 focused on its shale assets. On top of this, the company plans to do all of its investing within its cash flow. Devon's rig activity bottomed out in early 2016 at just 5 operating rigs, and the fact that the company anticipates quadrupling its number of active rigs over the next two years shows its support for the market.

While solely expanding within its budget, Devon Energy is anticipating double-digit growth in its oil production. This shows how the company is taking advantage of its impressive assets to grow future earnings. On top of this, assuming $60 per barrel crude in 2018, which is very likely given that crude prices are presently just 10-20% below this, the company expects 200% growth in cash flow from 2016 levels.

This should help support the stock price and reward investors well. More importantly, it will also allow the company to return its dividend to where it once was.

(Devon Energy Financial Improvements - Devon Energy Investor Presentation)

More importantly, even if oil prices do not recover all the way to $60 per barrel, the company's cash flow should stay strong as a result of a third of its oil and gas production hedged until 2017. Devon has an investment grade balance sheet and has decreased its net debt by 45% over the past year.

And on top of all this, it has no debt maturities until mid-2021. This means even if oil prices take extra long to recover, the company can handle a drawn-out oil crash without having to worry about raising cash to pay back debt. This shows why Devon Energy is a strong investment at this time.

Conclusion

Devon Energy has had a difficult time since the start of the mid-2014 oil crash. Even with recent stock price recoveries, the company's stock price is still just over half of its pre-crash price. And while the company was forced to cut its dividend, it continues to remain focused on its objectives.

Since the start of the crash, Devon Energy has been significantly reducing its expenses. The company has managed to save significant costs while continuing exploration. As a result, over the next two years, even with oil prices staying just a little bit over their present level, the company anticipates cash flow to double. At the same time, the company has minimal debt maturities until 2021.

Devon Energy's combination of increasing efficiency and improving financial position make it a strong investment at the present time.

Disclosure: I am/we are long DVN.

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.