Devon Energy Corp.: The Recent Weakness Is An Opportunity

Dec. 01, 2021 6:33 PM ETDevon Energy Corporation (DVN)33 Comments10 Likes

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 »

View of the pumpjack in the oil well of the oil field. The arrangement is commonly used for onshore wells producing little oil. Pumpjacks are common in oil-rich areas.

Funtay/iStock via Getty Images

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.

Chart
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

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.

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This article was written by

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As an experienced investor, I will help you stay on task more efficiently.

I am a former test & measurement doctor engineer (geodetic metrology). I was interested in quantum metrology for a while.

I live mostly in Sweden with my loving wife.

I have also managed an old and broad private family Portfolio successfully -- now officially retired but still active -- and trade personally a medium-size portfolio for over 40 years.

“Logic will get you from A to B. Imagination will take you everywhere.” Einstein.

Note: I am not a financial advisor. All articles are my honest opinion. It is your responsibility to conduct your own due diligence before investing or trading.

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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.

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