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Devon Lowered to Underperform

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We have lowered our recommendation of independent oil & gas company Devon Energy Corporation (DVN - Free Report) to Underperform from Neutral. The earnings results of the company were unimpressive in the first half of the year as the company failed to match our earnings expectation in the first two quarters of 2012.

In the second quarter of 2012, despite registering year-over-year growth in production, the performance was impacted by lower realized prices of the products sold, which resulted in a dip in total revenue from the prior-year quarter.

Besides, operations of oil and gas companies are subject to various rules and regulations in the countries of operation. Thus, changes and modifications to public policies remain as generic threats. Compliance with provisions and adherence to any change in the policies would increase operating costs and constrain margins.

Devon’s positive catalyst is its deep and diversified portfolio. The company is presently leveraging its assets to generate funds required for the development of its operations. For example, after partnering with Sinopec for $2.2 billion for the development of its North American assets, the company has entered into an agreement, worth approximately $1.4 billion, with Japan’s Sumitomo Corporation for the development of the Cline Shale and the Midland-Wolfcamp Shale in west Texas.

Energy companies are continuously on the lookout for new reserves to replace depleting resources. Exploration activity does not necessarily result in commercially viable wells, which increases the operating cost of the company and Devon is no exception.

Devon Energy currently retains a short-term Zacks #3 Rank (Hold rating). The company competes with EOG Resources, Inc. (EOG - Free Report) and Noble Energy, Inc. (NBL - Free Report) among others.

Based in Oklahoma City, Oklahoma Devon Energy Corporation, is an independent energy company engaged primarily in exploration, development and production of oil and natural gas. The company’s oil and gas operations are mainly concentrated in the onshore areas of North America, including the United States and Canada. The company has 5,200 full time employees and a market cap of $24.73 billion.

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