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Devon Misses EPS, Revs Up

Zacks Equity Research

Devon Energy Corporation (DVN) reported second-quarter 2012 pro forma earnings per share of 55 cents, missing the Zacks Consensus Estimate of 81 cents. The reported quarter’s results were also way below the year-ago quarter’s earnings of $1.71 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 earnings per share of $1.18 in the second-quarter 2012, down from $6.50 in the year-ago quarter. The variance between GAAP and pro forma earnings was due to a gain of 64 cents from oil and gas derivatives and a penny charge related to interest rate and other financial instruments.


Devon’s quarterly revenue was $2.6 billion versus $3.2 billion in second-quarter 2011. This decline in revenue was due to lower oil, gas and natural gas liquids (“NGL”) sales, and decrease in marketing and midstream revenues; partially offset by higher oil, gas and NGL derivatives.

The reported revenue beats the Zacks Consensus Estimate of $2.4 billion.

Operating Results

In second-quarter 2012, Devon Energy’s total oil, natural gas and NGL production averaged to 679,000 barrels of oil-equivalent (“Boe”) per day compared with 660,000 Boe in the year-ago quarter. This growth was primarily driven by increase in production of Jackfish and Permian Basin operations.

However, the production was partially affected due to interruptions in natural gas processing facilities and maintenance downtime at the company’s Bridgeport operations in North Texas.  

The company’s lease operating expenses in the reported quarter increased to $513 million from $453 million in the year-ago quarter. The rise in expenses was due to higher industry costs related to an increase in operations in the oil-focused basins.

In the second quarter of 2012, interest expenses were $99 million, up $14 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 $30.51 per Boe compared with $37.62 per Boe in the year-ago period. This decline in price was due to depressed oil, gas and NGL realized prices.

The oil price realization was down 12.2% year over year to $71.84 per barrel in the quarter under review from $81.82 per barrel in the year-ago quarter. Realized prices for gas were also down 35.3% year over year to $2.66 per thousand cubic feet (“Mcf”) from $4.11 per Mcf in the year-ago quarter. In second-quarter 2012, realized prices for NGL were also down 25.6% to $31.42 per barrel from $ 42.25 per barrel in the year-ago quarter.

Financial Health

Cash and cash equivalents as of June 30, 2012 were $6.1 billion versus $5.6 billion as of December 31, 2011.

Capital expenditure in second-quarter 2012 was $2.2 billion, up from $1.9 billion reported in the year-ago period.

Long-term debt was $8.5 billion as of June 30, 2012 compared with $6.0 billion as of December 31, 2011.

Joint Venture with Sumitomo Corporation

Devon Energy Corporation has entered into an agreement, worth approximately $1.4 billion, with Sumitomo Corporation. Per the contract, Sumitomo will invest $340 million in cash upon closing of the agreement and an added $1.025 billion will be invested as a drilling carry. In exchange, Sumitomo will enjoy 30% of Devon’s interest in 650,000 net acres in the Cline Shale and the Midland-Wolfcamp Shale.

In this agreement, Devon will act as an operator and will be responsible for commercially marketing all production from these plays into the North American market.

This drilling carry investment will fulfill 70% of Devon’s capital requirements related to overall drilling and completion costs. Both companies expect to drill approximately 40 gross wells in 2012. Based on the current work program, Devon expects the entire $1.025 billion carry to be realized within the middle of 2014.

Peer Update

Chesapeake Energy Corporation (CHK), which competes with Devon Energy, is slated to report second-quarter earnings after the close of trading on the New York Stock Exchange on August 6, 2012. The Zacks Consensus Estimates for its second-quarter 2012 and full-year 2012 earnings are currently pegged at 7 cents and 38 cents per share, respectively.

Our View

In the quarter under review, Devon Energy managed to beat our revenue estimate, but failed to meet our earnings projection.

We view Devon Energy as an organization with diversified portfolio including unconventional resources and significant long-term growth potential. We believe Devon’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 near term.

But, at the same time, we are concerned about oil, natural gas and NGL price volatility, changes in product demand, and stringent rules and regulations.  

Devon Energy currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

Oklahoma City, Oklahoma-based Devon Energy Corporation is an independent energy company. The company engages primarily in exploration, development and production of oil and natural gas.

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