Devon Energy Earnings Surprise

Devon Energy (DVN - Analyst Report) posted better-than-expected results for the second quarter of 2009 due to record production volume and favorable service and supply costs across all major operating segments. Adjusted EPS of 85 cents surpassed the Zacks Consensus Estimate by 28 cents.

This, however, was significantly lower than $3.39 recorded last year, as the commodity market remained subdued amid the global downturn. Reported net income came at $314 million or 70 cents per share, compared to $1.3 billion or $2.88 per share a year ago.

Production volume soared 12% to 65.4 million barrels of oil equivalent (BOE) or 718.5 thousand BOE per day, exceeding the top range of quarterly guidance by approximately 5%. This was primarily driven by the U.S. onshore natural gas volume augmentation led by the Barnett Shale field in Texas and higher Canadian natural gas production due to lower government royalties.

The Jackfish oil sands project led oil production growth further boosted the overall volume. Daily production volumes of oil, natural gas and natural gas liquids (NGL) averaged 169.4 thousand barrels (up 17%), 2.8 billion cubic feet (up 11%) and 83.9 thousand barrels (up 9%), respectively.

Revenues dipped 41% to $2.1 billion as lower realized energy prices more than offset the production growth. Revenues from oil, natural gas and NGL were $808 million (down 44%), $740 million (down 67%) and $170 million (down 55%), respectively. Marketing and midstream revenues halved to $359 million. Realized price, including the impact of hedges, for oil, natural gas and NGL averaged $52.4 per barrel (down 53%), $3.4 per thousand cubic feet (down 59%) and $22.2 per barrel (down 59%), respectively.

Devon Energy benefited from the continued downward pressure on service and supply costs due to weak activity levels across the industry. Lease operating expenses (LOE) declined by 15% to $7.8 per BOE. General and administrative expenses increased 1% to $182 million. This, however, includes the restructuring cost of around $33 million arising from consolidation of International and Gulf divisions.

Devon Energy maintained a healthy financial and liquidity position. It generated cash flows of $1.1 billion (before balance sheet changes) in the second quarter, which was sufficient to finance capex and dividend pay outs for the quarter. Devon Energy exited the quarter with around $2.6 billion of available cash and unused credit lines and 33% net debt to capitalization ratio. It has raised its 2009 production guidance by 7 million BOE to 243-247 million BOE. We maintain our Neutral recommendation for the company.

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