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Devon Beats EPS, Misses Sales

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Devon Energy Corporation (DVN - Free Report) reported third-quarter 2012 pro forma earnings per share of 88 cents, beating the Zacks Consensus Estimate of 68 cents. Quarterly earnings were way below the year-ago quarter’s figure of $1.54 per share.

This decline in earnings was due to higher depreciation, depletion and amortization (“DD&A”) charges and an increase in general and administrative expenses, partially offset by lower marketing and midstream operating expenses and a decline in tax charges.

On a GAAP basis, the company reported a quarterly loss of $1.80 per share compared with earnings of $2.50 per share in the year-ago quarter. The variance between GAAP and pro forma earnings of $2.68 per share was due to asset impairment charges, costs related to interest rate and other financial instruments, and charges from oil and gas derivatives.


Devon’s quarterly revenue was $1.9 billion versus $3.5 billion in third-quarter 2011. This decline in revenue was due to a decrease in oil, gas and natural gas liquids (“NGL”) sales, and oil, gas and NGL derivatives, and lower marketing and midstream revenues. The reported revenue missed the Zacks Consensus Estimate of $2.3 billion.

Operating Results

In third-quarter 2012, Devon’s total oil, natural gas and NGL production averaged to 678,000 barrels of oil-equivalent (“Boe”) per day, up 3.0% year over year. This increase was primarily driven by strong production from the company’s U.S. operations; partially offset by a decrease in natural gas volumes and planned shut-down for facilities maintenance at the Jackfish 1 oil sands project.

The company’s lease operating expenses in the reported quarter increased to $513.0 million from $475.0 million in the year-ago quarter.

In the third quarter of 2012, the company’s interest expenses were $110.0 million, up from $104.0 million from the year-ago period due to an increase in total debt level.

Realized Prices

In the reported quarter, Devon’s overall realized price was $31.74 per Boe compared with $36.30 per Boe in the year-ago period. This decline in price was due to depressed gas and NGL realized prices; partially offset by an increase in realized oil prices.

In the quarter under review, oil price realization was $76.11 per barrel, up $5.35 per barrel from the year-ago figure.

In third-quarter 2012, realized gas prices were down $3.02 per thousand cubic feet (“Mcf”) from $4.16 per Mcf in the prior-year quarter.

Realized prices for NGL were $26.89 per barrel in the third quarter of 2012, down $15.55 per barrel from the prior-year quarter. 

Financial Health

Cash and cash equivalents as of September 30, 2012 were $5.3 billion versus $5.6 billion as of December 31, 2011.

Capital expenditure in third-quarter 2012 was $2.0 billion, up from $1.8 billion in the year-ago period.

As of September 30, 2012, long-term debt was $8.5 billion compared with $6.0 billion as of December 31, 2011.

Peer Update

Another large operator in the oil and gas sector Chesapeake Energy Corporation (CHK - Free Report) reported adjusted third-quarter 2012 earnings of 10 cents per share, beating the Zacks Consensus Estimate by a penny. However, the reported figure dropped more than 86% from 72 cents per share in the prior-year quarter. This underperformance came in the wake of a 59.1% decline in average price realizations for natural gas.

In the third quarter of 2012, the company’s total revenue decreased 25.3% year over year to $2,970.0 million from $3,977.0 million. However, the top line surpassed the Zacks Consensus Estimate of $1,417.0 million.

Our View

Devon Energy is an organization with a stable balance sheet as well as solid oil and gas reserves. The company also maintains highly competitive cost structure. We believe the company’s continuous investment in low-risk development projects will provide reliable and repeatable production and reserves additions. The successful drilling at those assets subsequently contributes robust top-line performance in the future.

For the next year, Devon has hedged 1.0 billion cubic feet per day of its natural gas production at a weighted average floor price of $3.88 per Mcf. We believe this initiative will help the company to safeguard its future revenue stream in the volatile natural gas pricing environment.

We are positive about Devon’s recent 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, we believe that Devon’s plan to merge its U.S. personnel into a single operations group will allow it to save $80.0 million annually due to the reduction in general and administrative expenses, and lower personnel costs.

However, we are skeptical about oil, natural gas and NGL price volatility, changes in product demand, and stringent rules and regulations. 

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 $22.77 billion, the company has 5,200 full time employees.

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