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Does Devon Energy Corporation's (NYSE:DVN) Debt Level Pose A Problem?

Simply Wall St

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Investors pursuing a solid, dependable stock investment can often be led to Devon Energy Corporation (NYSE:DVN), a large-cap worth US$11b. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the health of the financials determines whether the company continues to succeed. This article will examine Devon Energy’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into DVN here.

Check out our latest analysis for Devon Energy

Does DVN Produce Much Cash Relative To Its Debt?

Over the past year, DVN has reduced its debt from US$10b to US$6.2b , which includes long-term debt. With this debt repayment, DVN currently has US$1.3b remaining in cash and short-term investments to keep the business going. Moreover, DVN has generated cash from operations of US$2.3b during the same period of time, resulting in an operating cash to total debt ratio of 37%, signalling that DVN’s current level of operating cash is high enough to cover debt.

Can DVN meet its short-term obligations with the cash in hand?

At the current liabilities level of US$2.0b, the company has been able to meet these obligations given the level of current assets of US$2.7b, with a current ratio of 1.37x. The current ratio is the number you get when you divide current assets by current liabilities. For Oil and Gas companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:DVN Historical Debt, June 4th 2019

Does DVN face the risk of succumbing to its debt-load?

DVN is a relatively highly levered company with a debt-to-equity of 78%. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can check to see whether DVN is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In DVN's case, the ratio of 3.33x suggests that interest is appropriately covered. Large-cap investments like DVN are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.

Next Steps:

Although DVN’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure DVN has company-specific issues impacting its capital structure decisions. You should continue to research Devon Energy to get a more holistic view of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for DVN’s future growth? Take a look at our free research report of analyst consensus for DVN’s outlook.
  2. Valuation: What is DVN worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether DVN is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.