Devon Energy Corp.: The Recent Weakness Is An Opportunity

Summary

• The company announced better-than-expected adjusted earnings of $1.08 compared to a loss of $0.04 per share in the year-ago quarter.
• Devon Energy produced a record of 608K Boep/d in the third quarter, or 7.2% higher than the 2Q21.
• For the third quarter of 2021, the total dividend payment is $0.84 per share.
• I recommend buying DVN below $41.
• Looking for a helping hand in the market? Members of The Gold And Oil Corner get exclusive ideas and guidance to navigate any climate. Learn More »

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Introduction

The Oklahoma City-based Devon Energy Corp. (NYSE: NYSE:DVN) reported third quarter 2021 earnings on November 2, 2021.

1 - Q3 Snapshot

The company announced better-than-expected adjusted earnings of $1.08 compared to a loss of $0.04 per share in the year-ago quarter. The total revenues were $3,466 million, significantly higher than the same quarter a year ago. The recent merger boosted results significantly.

The third quarter production of 608K Boep/d is up 86.5% compared to 3Q20. Oil production averaged 326K Boep/d. The increase was due to solid contributions from Delaware and Williston Basin assets.

Source: Company Presentation

2 - Revenues

Total revenues of $3,466 million beat analysts' expectations and were much higher year-over-year. Revenues in 3Q20 were $1,067 million.

However, CEO Richard Muncrief said in the conference call:

Devon's third quarter results were outstanding. Once again, showcasing the power of our Delaware focused asset portfolio and the benefits of a financially driven business model. Our team's unwavering focus on operations excellence has established impressive momentum that has allowed us to capture efficiencies, accelerate free cash flow, reduce leverage, and return a market-leading amount of cash to shareholders.

3 - Investment Thesis

The investment thesis is now manifest, and I recommend DVN as a long-term opportunity that should be accumulated on weakness. On a side note, the dividend policy is positive for long-term investors.

As you can witness those recent days again, oil prices are subject to wild swings due to a threatening coronavirus that seems to mutate daily. Hence, I recommend allocating 30% to 40% of your position to short-term trading LIFO using technical analysis. It is the perfect strategy that protects you against the sudden change in the oil sector and lets you keep a core long-term position for much higher prices.

4 - Stock Performance

DVN outperformed its peers and is up 198% on a one-year basis.

Data by YCharts

Note: The company is now paying an excellent dividend yield of 8+% (including the extra dividend).

5 - Devon Energy Balance Sheet 3Q21: The Raw Numbers

Note: Total revenues include oil/gas and NGL sales, oil/gas and NGL derivatives, and marketing and midstream revenues.

DVN (including WPX Energy)	3Q20	4Q20	1Q21	2Q21	3Q21
Oil and Gas Revenue in $ Million	678	786	1,757	2,154	2,635
Total Revenues incl. derivatives, midstream + others in $ Million	1,067	1,280	2,050	2,417	3,466
Net Income in $ Million	-92	-102	213	256	838
EBITDA in $ Million	172	250	540	938	1,635
EPS diluted in $/share	-0.25	-0.27	0.32	0.38	1.24
Cash from operations in $ Million	472	377	592	1,093	1,598
Capital Expenditure in $ Million	204	220	499	509	484
Free Cash Flow in $ Million	268	157	93	584	1,114
Cash and cash equivalent $ Million	1,707	2,237	1,878	1,539	2,321
Total Debt in $ Million	4,297	4,298	7,268	6,502	6,492
Dividend per share in $	0.11	0.30	0.34	0.49	0.84
Share outstanding in million	383	383	656	679	673
Liquids and NG Production	3Q20	4Q20	1Q21	2Q21	3Q21
Oil Equivalent Production in KBoep/d	326	333	499	567	608
Price per Boe (composite) incl. cash settlement	22.93	24.77	33.97	34.64	40.48
Price per Mcf	1.54	1.96	2.69	2.20	2.77

Click to enlarge

Source: Devon Energy filing and Fun Trading Analysis.

Trends, Charts, and Commentary: Revenues, Free Cash Flow and Upstream Production

1 - Quarterly revenues: Revenues of $3,466 million in 3Q21

Devon Energy posted total revenue of $3,466 million in the third quarter of 2021, higher significantly from $1,067 million posted in 3Q20. For more data, please look at the table above.

The total production expenses for the third quarter were $555 million, from $271 million in 3Q20.

2 - Free cash flow was a record $1,114 million in 3Q21

Note: The generic free cash flow is the cash from operations minus CapEx.

Trailing twelve-month free cash flow was $1,948 million and a record of $1,118 million for 3Q21.

The Board of Directors authorized a $1 billion share buyback, representing 4% of Devon’s market capitalization.

The company is paying a variable dividend now based on free cash flow. The dividend consists of two parts:

• A fixed quarterly dividend of $0.11 per share.
• A variable payment ($0.73) based on a % excess free cash flow multiplied by a payout ratio determined by the board as high as 50%.

For the third quarter of 2021, the total dividend payment is $0.84 per share.

Source: Company Presentation

3 - Quarterly Production: Production was 608K Boep/d in 3Q21.

Devon Energy produced a record of 608K Boep/d in the third quarter, or 7.2% higher than the 2Q21.

Production repartition for the five prominent locations are as follows:

The Delaware Basin is the number one producing asset for Devon Energy, representing 58.9% of the total production. Liquids represent 74.2% of the total output.

Total oil equivalent realized prices, including cash settlements, were $40.48 per Boe, up 76.5% year-over-year. Below are the historical prices realized for Boe and NG.

• Realized oil prices for the third quarter were $57.59 per barrel, up 50.7% from $38.21 in the year-ago period.
• Realized prices for natural gas liquids were up 155.4% to $30.80 per barrel from $12.06 in the prior-year quarter.
• Realized gas prices were up 79.9% to $2.77 per thousand cubic feet from $1.54 in the prior-year quarter.

4 - 4Q21 and 2022 Guidance

Devon Energy expects total production for 4Q21 in the range of 583,000-601,000 Boep/d. Fourth quarter expenditure is projected in the range of $465-$535 million. The company’s 2022 total production is expected in the range of 570,000-600,000 Boe/d and upstream capital investment within $1.9-$2.2 billion.

Source: Company Presentation

5 - Debt situation, liquidity: No worry on this side.

As of September 30, 2021, the company had cash and cash equivalents, including restricted cash of $2,321 million, up from $2,237 million on December 31, 2020.

Devon Energy exited the third quarter with $2.3 billion of liquidity and no debt maturities till 2023. Long-term debt amounted to $6,492 million, up from $4,298 million on December 31, 2020. Devon Energy’s net cash from operating activities for third quarter 2021 was $1,598 million compared with $472 million in the year-ago period.

The net debt is now $4.171 billion with a net debt-to-EBITDA of 1.24x.

Source: Company Presentation

Technical Analysis and Commentary

Note: The chart is adjusted from the dividend.

DVN forms an ascending channel pattern with resistance at $45.2 and support at $41. We could also see a bullish pennant formation using a longer time frame. However, using a longer-term TA chart is uncertain due to the high volatility that we are experiencing now.

The short-term trading strategy is to trade LIFO about 30%-40% of your position and keep a core long-term position for a much higher payday. I suggest selling between $45 and $46 and waiting for a retracement between $41.25 to $40.65.

DVN could experience a breakdown caused by the new omicron variant and retests the lower support at $37.35.

Conversely, if the recent panic triggered by this new mutation evaporates quickly, then DVN could break out and reach $47-$48.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool-only to help you adopt the right strategy. It is not a way to "know" the future. No one and nothing can.

Author's note: If you find value in this article and would like to encourage such continued efforts, please click the "Like" button below as a vote of support. Thanks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in DVN over 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.

Comments

[banmate6]

Here is my DVN investment.

DVN shares total price $/share

7-Nov-2014 100 $6,466.95 $64.6100
31-Dec-2014 0.394 $24.00 $60.9613
31-Mar-2015 0.401 $24.09 $60.0973
30-Jun-2015 0.398 $24.19 $60.7936
30-Sep-2015 0.632 $24.29 $38.4129
31-Dec-2015 0.771 $24.44 $31.7000
31-Mar-2016 0.957 $24.62 $25.7300
30-Jun-2016 0.183 $6.21 $33.9300
30-Sep-2016 0.163 $6.22 $38.2585
30-Dec-2016 0.133 $6.23 $46.8082
31-Mar-2017 0.158 $6.24 $39.3987
30-Jun-2017 0.204 $6.25 $30.6850
29-Sep-2017 0.169 $3.59 $36.9380
29-Dec-2017 0.149 $6.27 $42.0255
29-Mar-2018 0.195 $6.28 $32.1998
29-Jun-2018 0.191 $8.39 $43.8642
28-Sep-2018 0.207 $8.41 $40.5431
28-Dec-2018 0.395 $8.42 $21.3082
29-Mar-2019 0.27 $10.41 $31.3531
28-Jun-2019 0.331 $9.54 $28.8441
27-Sep-2019 0.39 $9.57 $24.5578
27-Dec-2019 0.363 $9.60 $26.4582
31-Mar-2020 1.496 $9.63 $6.4359
1-Jul-2020 1.0205 $11.94 $11.7000
1-Oct-2020 1.2892 $12.05 $9.3500
31-Dec-2020 0.7645 $12.19 $15.9500
1-Apr-2021 0.5384 $12.28 $22.8100
1-Jul-2021 0.4128 $12.34 $29.8930
1-Oct-2021 0.3404 $12.38 $36.3662

A $6,466.95 basis is now worth $4,514.37, a -30.19% return on -4.89% CAGR. This has been no doubt a terrible investment. I bought on a so called North American energy renaissance, in a number of fossil fuel companies.

Bad mistake. I was ignorant of the cyclicality, an especially dishonest sector, and a secular turn against fossil fuels. I've sold out, with DVN the last of it. I lost about 30% of a total of $65k committed. Mistakes I won't make again.

So what should I do with DVN? I ask this occasionally but haven't found conviction to move. Can I ever really break even, without committing more money to what I still see as a dishonest industry?

[Fun Trading]

@banmate6

You need to understand cyclicity and adopt a trading strategy that fits the sector. Without a proper understanding of the issue, you are bound to repeat your mistakes and lose your money. How on earth do you believe selling the sector with a 30% loss can be justified in such a short period? Paper loss is just an inherent part of the cycle. Please, contact your CFA to get some structural advice.

[Tambo210]

@banmate6 I lost 100% of my ESV/VAL stock in that same period. (well after they declared Ch11).
30% loss isn't bad in the oil sector in my opinion. The dividends you'll collect this year and next should chip away at the loss assuming you don't DRIP. I would love to have had your portfolio.

BTW. Buying DVN at 9bucks in Oct 2020...was a steal!

Nothing's a guarantee, but I honestly think you're in good hands with their capital return policy and even lower hedge book next year (oil and gas).

[Fun Trading]

@Tambo210

Agree, it is a good long-term bet on the energy sector. This company has no risk of bankruptcy and a secured dividend. Realizing a loss on such stock is nonsensical.

[PEAK AUTOS]

Great management. So glad I bought this stock well over a year ago.
I totally agree with their dividend strategy but I do not think most investors out there know that DVN is an 8 % payer.

[Fun Trading]

@PEAK AUTOS

Yes, DVN is not widely known, and the way they decide the quarterly dividend lets the stock pass through the radar without being noticed.

[Quiberon Bay]

@PEAK AUTOS Definitely correct. It's not one of the better known issues. And, the way many brokerages report dividend yield info skews the reality. Seeking Alpha *does* annualize the 84¢ payout and show a yield of 8.08% at the moment, but my brokerage accounts do not.

[Quiberon Bay]

One of my best performers. Was fortunate to start accumulating at $24 and I still like it under $42. Get in this week and you're picking up an 8% dividend (annualized) to boot. What's not to like? We can all see from the immediate past that $DVN doesn't need $80 oil to do quite well.

[Fun Trading]

@Quiberon Bay

Good comment thank you and congrats on your investment in DVN.

[Tambo210]

@Quiberon Bay Snap. I bought at $24.

I bought the first time at $19, sold calls (stupid) and lost them at $23. Saw it zoom up to $30, then there was a freakish pull back to $24 where I swapped into $DVN from $WMB and never looked back.

[Quiberon Bay]

@Tambo210 We’ve all done things we regret in the covered call universe.

[Sacdukeman]

I bought a little at 42 - will try to add a bit more. Have the same amount in EOG, which has dropped more than Devon recently.

[Fun Trading]

@Sacdukeman

Good choices in the sector. I like both DVN and EOG.

[Sacdukeman]

@Fun Trading That's reassuring. I picked up a bit more of each this morning, so to qualify for the upcoming large special dividends.

[simonthecat]

Excellent article as it rationalizes my "confirmation bias" towards DVN. I am long, and think that it will outperform for the next several years. The FCF yield, and discipline growth while still being very shareholder friendly make me put it at the top of my holding list, above AR and MRO.

[Fun Trading]

@simonthecat

Thank you Simon, I think it is a good choice. Best of luck!

[Philip K Blakeney]

U may also wanna look at some recent upgrades and divincreases. IF Biden and this stimulus are to be believed, infrastructure should be a good spot... not recently.
NS-NEW PTs21-22 160div11.5%
Ceqp... PR 32... 250div10%
MMP...DIV UP $4.25ish 9+%

[Fun Trading]

@Philip K Blakeney

Thank you for the tip.

[Tambo210]

My best performer.
I traded out of $WMB and into this at $25.
I still want to own both.

[Fun Trading]

@Tambo210

Glad you like this company.

[User 40509285]

@Tambo210 Why on earth would trade out of WMB? Just own both like I do. I own OKE too. I highly recommend all three.

[Tambo210]

@G-man$$ Can't afford both. I try to buy 1k shares of each (nice round number to sell calls when I need to).
( I know you're going to say, halve my DVN holding and put it into $WMB).
I believe $DVN will be $60 at some point next year as more hedges roll off (pegged to $45 at the moment). Even if Oil drops to $60, we're still banking more cash. Whether of not DVN will announce in Jan, their 2022 Capex which involves more drilling, remains to be seen. But for now, I'm happy with holding $DVN. If one of my other holdings recovers, then I'll buy into $WMB.

As a side note, I wouldn't own $KMI for now. $WMB just has a better management IMHO.