Devon Energy Corporation (DVN - Free Report) has lowered 2020 capital expenditure by nearly 30% to counter the challenges posed by the sudden decline in commodity prices. The revised expenditure amounts to $1.3 billion, which will allow the company to preserve liquidity.
The planned reduction of nearly $500 million in capital expenditure will be spread across the company’s diversified portfolio, with major cuts directed toward STACK and Power River Basin assets.
The company has hedged around 40% of expected oil production and exposure of the remaining 60% oil production to volatile prices have forced management to cut down capital expenditure plans. In the current low price and demand scenario, it is not advisable to increase oil production assets.
Improvement of Liquidity & Cost Structure
Devon Energy started 2020 with liquidity of $1.8 billion. It has entered into an agreement to sell Barnett Shale gas assets for $770 million, which will further increase its liquidity. The agreement is expected to close this year.
Even before the drastic drop in commodity prices, Devon Energy had been taking steps to improve the cost structure. Courtesy of various cost-saving initiatives, the company was able to reduce G&A expenses by $240 million in 2019 and has intention to carry on cost-management initiatives in 2020.
Why Global Oil Prices are Declining?
The ongoing decline in commodity prices was due to reduction in global demand as the novel coronavirus has impacted global economic growth. Governments across the globe are issuing directives related to travel, temporary closure of schools, factories, offices, and asking people to avoid mass gatherings, which are adversely impacting demand for crude.
Saudi Arabia — the world’s top oil exporter — has plans to increase crude oil production above 10 million barrels per day in April, after the collapse of its OPEC supply cut agreement with Russia. The decision of Russia and Saudi Arabia — the major producers of crude apart from the United States — to produce more crude volumes could further lower the price of the commodity from the current level due to supply glut.
We have already seen companies belonging to the oil and gas sector like Occidental Petroleum Corporation (OXY - Free Report) , Noble Energy (NBL - Free Report) and Murphy Oil (MUR - Free Report) cutting down on capital expenditures to preserve liquidity and slowing down expansion plans amid the falling oil prices.
The bumpy ride of global oil prices are expected to continue in the near term, until the demand for commodities normalizes and oil producing majors come to an agreement about reducing production volumes, which in turn will stabilize oil prices.
Currently, Devon Energy carries a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Devon Energy’s shares have underperformed the industry in the past 12 months.
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