Devon Energy (NYSE: DVN) didn't have quite the finish to 2018 that it was hoping for, as its fourth-quarter results came in a bit below expectations. However, the company sees much brighter days ahead as it plans to complete its transformation into a U.S.-focused oil growth company by the end of this year. That transition, and the company's plan to return even more cash to shareholders, make it easy for investors to overlook its less-than-stellar finish to 2018.
Drilling down into the results
Guidance or Expectations
Difference at Midpoint (Shortfall)
515,000 to 543,000 BOE/D
U.S. oil production
127,000 to 131,000 BPD
Core earnings per share
Data source: Devon Energy. BOE/D = barrels of oil equivalent per day.
Total company production came in about 3,000 barrels of oil equivalent per day (BOE/D) above the midpoint of Devon's guidance range. That's due in part to a rebound in Canada, where output averaged 120,000 BOE/D and hit the high end of the company's projection.
That improvement in Canada helped offset the fact that Devon's U.S. oil production came in below expectations, due entirely to timing issues in the Delaware and Powder River Basins. Even with those headwinds, Devon's U.S. oil production increased by 17% for the year versus 2017. The biggest growth driver was the Delaware Basin, where production increased 49% year over year during the fourth quarter. Growth in the Delaware Basin has accelerated in early 2019 as the company completed wells slated for last year, resulting in a 14% increase in production during January compared with the fourth quarter. Output in the Powder River Basin has also grown significantly in early 2019, averaging 22,000 BOE/D in January, up from 18,000 BOE/D during the fourth quarter.
With Devon's timing issues pushing so much production into early 2019, it had a noticeable impact on earnings, which came in well below expectations since the Delaware Basin is one of the company's highest-margin assets. However, the oil company still generated strong cash flow during the quarter, hauling in $542 million, pushing its full-year total to $2.2 billion.
Image source: Getty Images.
A look at what's ahead
In addition to reporting fourth-quarter results, Devon Energy unveiled the final step in its transformation to a U.S.-focused oil growth company. Devon intends on pursuing the separation of its Canadian and Barnett Shale assets, which it hopes to complete by the end of this year. The company will evaluate several ways to separate these assets, including a potential sale or spinoff. This move will allow the company to focus all its attention on its four top-tier U.S. oil growth assets: the Delaware Basin, Powder River Basin, Eagle Ford Shale, and the STACK Shale play.
Devon plans on investing between $1.8 billion and $2 billion into those four assets next year, which is a significant reduction from its initial plan to spend between $2.4 billion and $2.7 billion in 2019. However, the company noted that it could fund that spending level on the cash flow it can produce on $46 oil. Furthermore, it's enough money to grow its U.S. oil production 13% to 18% in 2019.
Looking further ahead, the new Devon anticipates that it can grow its U.S. oil production at a 12% to 17% annual rate through 2021, funded with the cash flows it can produce at $46 a barrel. Meanwhile, at $55 oil -- where crude is these days -- the company can generate $1.6 billion in excess cash over that timeframe.
Devon also announced plans to return more money to shareholders. The company added $1 billion to its share repurchase plan, boosting its total authorization to $5 billion, which is enough cash to retire 30% of its outstanding shares at the current stock price. The company repurchased $3.4 billion in stock last year and ended 2018 with $2.4 billion in cash, leaving it with more than enough to cover its remaining authorization. In addition, Devon increased its quarterly dividend 13%.
A dramatically new company
Devon Energy has transformed from a bloated oil company with assets scattered around the world into one focused on four top-tier regions. The company believes that these areas can produce healthy growth while also generating boatloads of free cash flow at lower oil prices, which will put it in a stronger position to withstand the swings of the oil market. That makes it one of the more compelling oil stocks in the U.S. shale industry these days.
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