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Devon Energy (DVN) Down 16.8% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Devon Energy (DVN - Free Report) . Shares have lost about 16.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Devon Energy due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Devon Energy Q3 Earnings Top Estimates on Strong Prices

Devon Energy Corp.  reported third-quarter 2018 adjusted earnings per share of 63 cents, which surpassed the Zacks Consensus Estimate of 43 cents by 46.5%.  The bottom line was driven by strong realized prices.

On a GAAP basis, the company reported earnings of $5.14 compared with 37 cents registered in the year-ago quarter. The difference between operating and GAAP figures in the reported quarter was due to earnings from discontinued operations.

Revenues

Devon’s quarterly revenues of $2,579 million outpaced the Zacks Consensus Estimate of $2,126 million by 21.3%. Total revenues were up 33.4% from the year-ago figure of $1,933 million.

This improvement in total revenues can be attributed to solid contribution from the Upstream and Marketing businesses.

Highlights of the Release

In the third quarter of 2018, total production touched 522,000 barrels of oil equivalent (Boe) per day. Notably, the actual production was within the expected range of 517,000-541,000 Boe per day. U.S. production was 418,000 Boe per day, courtesy of strong contribution from the company’s Delaware and Eagle Ford assets.

During the reported quarter, total expenses of Devon increased 40% year over year to $2,417 million. The year-over-year rise in expenses was owing to higher production and marketing costs.

Devon continues to advance on its $4 billion share repurchase plan. The company has repurchased 67 million shares, or nearly 13% of outstanding shares, at a total cost of approximately $2.7 billion. By the first quarter of 2019, it expects to exhaust the share repurchase authorization.

Currently, Devon’s divestiture program have reached $4.7 billion and it expects to achieve the $5 billion divestiture target around year-end.

Year to date, the company retired $828 million long-term debt, which will lower its annual interest expenses by $66 million and is likely to have a positive impact on earnings.

Realized Prices

Realized oil prices in the quarter were $47.63 per barrel, up 18.9% from $39.9 a barrel in the year-ago quarter. Realized prices for natural gas were down 14.4% to $2.20 per thousand cubic feet (Mcf) from $2.57 per Mcf in the prior-year quarter.

Total realized prices, including cash settlements, were $31.61 per Boe, up 20.7% year over year due to higher prices of commodities.

Financial Health

As of Sep 30, 2018, the company generated cash and cash equivalents of $3,102 million, up from $2,642 million on Dec 31, 2017. As of Sep 30, 2018, long-term debt amounted to $5,791 million down from $6,749 million on Dec 31, 2017.

Devon’s cash flow from operating activities in third-quarter 2018 was $807 million compared with $501 million in the year-ago quarter. Capital expenditure totaled $598 million, higher than $467 million in third-quarter 2017.

Guidance

For 2018, Devon reiterated its projection regarding U.S. oil production. The company anticipates the metric to be 17% higher than the 2017 level (up from the previous guidance of 15%), courtesy of strong contribution from its resource-rich assets.

Devon estimates total production from its assets in the fourth quarter of 2018 within 515,000-543,000 Boe per day.
 
E&P Capital expenditure for 2018 is expected to be $2.4 billion, of which 90% will be invested in the United States assets and 10% on its Canadian assets.

For 2019, E&P Capital expenditure is anticipated to be in the range of $2.4-$2.7 billion and production is expected to improve 15-19% from 2018 levels.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -25.39% due to these changes.

VGM Scores

At this time, Devon Energy has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Devon Energy has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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