We maintain our Neutral recommendation on Devon Energy (DVN) as the results of the company during the first quarter 2012 were lower than our estimates. The first quarter was affected by higher Canadian oil price differentials and increases in oilfield service and supply expenses.
Devon’s deep and diversified portfolio, primarily composed of unconventional resources, reflects significant long-term growth potential. The company has also shown capital discipline by rationally allocating resources to projects that are vital for its future growth and also by trying to live within generated cash flows. The company’s focus presently lies in the development of oil and liquids-rich opportunities in its portfolio, which we believe is an excellent strategic move given the depressed natural gas prices.
On the flip side, the growth of energy companies is heavily tied to oil, natural gas and NGL prices, which are volatile and cyclical in nature. Any unfavorable movement in the market price and a decline in realized prices affect the revenue and earnings stream of the company.
Compliance with regulations and adherence to any change in policies by the regulators would increase operating costs and constrain margins. Devon’s exploration, development and production operations involve substantial capital spending. Inability to raise capital resources, especially under the tight credit environment, might expose the company to execution challenges and thus hinder growth.
Our projection for the company’s revenue for the second quarter and 2012 is $2.46 billion and $10.1 billion, respectively. Earnings per share for the quarter and the year are expected to be a respective $1.18 and $5.23.
Devon Energy currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Devon’s peer EOG Resources, Inc. (EOG) and Chesapeake Energy Corporation (CHK) too retain Zacks # 3 Ranks.
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.
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