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Devon Energy Corporation (DVN - Analyst Report), an independent energy company, is scheduled to report its third-quarter 2012 financial results on November 7, 2012.

Second-Quarter Recap   

Devon Energy Corporation reported its second-quarter 2012 pro forma earnings per share of 55 cents, missing the Zacks Consensus Estimate of 81 cents. Quarterly result was also way below the year-ago quarter’s earnings of $1.71 per share.

The company’s quarterly revenue was $2.6 billion compared with $3.2 billion in second-quarter 2011. This decline in revenue was due to lower oil, gas and natural gas liquids (“NGL”) sales, and decrease in marketing and midstream revenues; partially offset by higher oil, gas and NGL derivatives. The reported revenue beats the Zacks Consensus Estimate of $2.4 billion.

Zacks Consensus  

The Zacks Consensus Estimate for third-quarter 2012 earnings is 68 cents per share, down from $1.54 per share in the prior-year quarter. Currently, the Zacks Consensus Estimate for the company’s earnings per share ranges between 59 cents and 77 cents.

For full-year 2012, the Zacks Consensus Estimate stands at $3.14 per share, lower than the prior-year earnings of $6.14 per share. The current Zacks Consensus Estimate for full-year 2012 ranges from $2.84 to $3.76 per share.

Estimate Revisions Trend

Agreement


For third-quarter 2012, we have observed that 1 estimate has been moved upwards while no downward revisions were witnessed in the last 7 days. However, we have noticed 7 upward and 8 downward movements in the last 30 days.

For full-year 2012, we have observed that 1 estimate has been moved upwards while no downward revisions were witnessed in the last 7 days. For the last 30 days, 6 estimates have moved upwards whereas 8 estimates went downwards.

Magnitude

In the last 7 days, the Zacks Consensus Estimate for third-quarter 2012 earnings increased a penny to 68 cents per share. However, quarterly earnings estimate decreased by a penny to 68 cents per share in the last 30 days.

For full-year 2012, earnings per share as per the Zacks Consensus Estimate increased by a penny to $3.14 in the last 7 days and decreased by 5 cents to $3.14 from $3.19 in the last 30 days.

Surprise History

With respect to earnings surprises, Devon Energy has topped the Zacks Consensus Estimate in two quarters out of the last four quarters. Over the last four quarters, the surprise ranges from -32.10% to 4.73% with an average of -12.60%.

Our Recommendation

We view Devon Energy as an organization with strong balance sheet, a deep inventory of oil and liquids-rich growth opportunities and a highly competitive cost structure. We have observed that currently the company follows inorganic as well as organic growth strategy.

Last month, Devon Energy inked a joint venture with Japan’s Sumitomo Corporation. We believe this transaction will enable the company to improve its future returns, and speed-up its assessment and progress of its assets in the Cline Shale and the Midland-Wolfcamp Shale.  

In addition, the company intends to merge its U.S. personnel into a single operations group by the first quarter of 2013. In the long run, this consolidation process will enable the company to save $80.0 million per year due to the reduction in general and administrative expenses, and lower personnel costs.

However, we expect volatility in commodity prices, cyclical nature of demand for oil, natural gas and NGL, stringent rules and regulations, and changes in public policies to some extent challenge the company’s future performance.

Devon Energy Corporation currently has short-term Zacks #3 Rank (Hold rating).

Oklahoma City-based Devon Energy Corporation engages primarily in exploration, development and production of oil and natural gas. With a market capitalization of $23.39 billion, the company has 5,200 full time employees. Devon Energy Corporation competes with Chesapeake Energy Corporation (CHK - Analyst Report).

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