Back to top

Image: Bigstock

Devon's (DVN) Hedging Safeguards It Amid Falling Oil Price

Read MoreHide Full Article

Devon Energy Corporation (DVN - Free Report) recently announced its oil and natural gas hedge position, which can assist the company in safeguarding its profitability amid the declining oil prices. The company has hedged nearly 80% of its estimated 2020 oil production at an average floor price of nearly $45 West Texas Intermediate (“WTI”). The company has also hedged 40% of its estimated 2020 natural gas production at an average Henry Hub protected floor price of $2.35 per million cubic feet.

The current market value of the company’s hedge position in 2020 is nearly $800 million based on the current WTI and Henry Hub strip price. Year to date, the price of crude oil has dropped 57.6%, which is adversely impacting the performance of the oil and energy sector.

The unexpected drop in oil prices and decline in global demand due to the coronavirus outbreak is taking a toll on oil and energy companies. The companies have been forced to delay expansion plans and forced to lower their capital expenditures to preserve liquidity and ensure enough cash flow to service their debts.

Why Commodity Prices Continues to be Choppy?

The sharp decline in commodity prices can be attributed to reduction in global demand as novel coronavirus has impacted global economic growth. Governments globally are issuing directives related to travel, asking people to stay at home, temporary closure of schools, factories, offices, and asking people to avoid mass gatherings, which are adversely impacting demand for crude.

The coronavirus pandemic continues to spread with total count of infected people having touched 250,618 and out of which 10,255 people have lost their lives. With social awareness among the people rising, millions worldwide are going for self-quarantine, which is a good ploy as it controls the spread but at the same time it is lowering the global demand for oil.

On top of it, Saudi Arabia, the world’s top oil exporter, has plans to increase crude oil production to 12.3 million barrels per day in April, after the collapse of its OPEC supply cut agreement with Russia. The decision of Russia and Saudi Arabia to produce more crude volumes could further lower the price of the commodity from the current level due to supply glut. Notably, U.S. shale based oil and gas companies will find it difficult to sustain themselves for a prolonged period under this scenario.

Other than Devon Energy, we have already seen companies belonging to the oil and gas sector including Occidental Petroleum Corporation (OXY - Free Report) , WPX Energy (WPX - Free Report) and Murphy Oil Corporation (MUR - Free Report) cutting down on capital expenditures to preserve liquidity and slow down expansion plans amid the falling oil prices. If the softness in prices persist the shale based companies might have to revise their production downwards as higher production volumes is not going help amid the falling prices.

Zacks Rank

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.

Price Performance

Devon Energy’s shares have underperformed the  industry in the past 12 months.

Today's Best Stocks from Zacks

Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2019, while the S&P 500 gained and impressive +53.6%, five of our strategies returned +65.8%, +97.1%, +118.0%, +175.7% and even +186.7%.

This outperformance has not just been a recent phenomenon. From 2000 – 2019, while the S&P averaged +6.0% per year, our top strategies averaged up to +54.7% per year.

See their latest picks free >>

Published in