Normally, I try to pay as little attention to analyst estimates as possible, but every now and again they can be helpful. And in looking at independent energy player Devon Energy (NYSE: DVN), I'm a little concerned about what those estimates might be telling me.
This wasn't an especially strong quarter relative to those estimates. Revenue was up more than 15%, and if that sounds weak for an energy producer, you're right. Production was soft, down 14%, and production costs continue to rise -- up about 16% per unit produced by my rough math. Higher costs, lower production ... that doesn't sound like a formula for success, and I get a little nervous when commodity plays starting missing numbers.
Looking a little further, we see that gas production volumes were down 11% while price realizations were up 30%. On the oil side, volumes were down 25% while realizations were up 55%. It should be noted, though, that there were divestitures that make straight comparisons a little misleading. Looking at the retained properties, production was down about 2% overall, but up sequentially only in the natural gas liquids business.
And earnings weren't the only news this quarter. The company made a sizable acquisition this quarter, buying Chief's assets in the Barnett Shale region for $2.2 billion. This will add about 617 billion cubic feet of natural gas to reserves, but at a relatively robust price (about $21.40 on a proven barrel of oil equivalent basis). Mitigating that price is the that Devon is already the largest player in the Barnett region (so there should be some synergies) and has experience drilling this geology.
The cost inflation at Devon worries me a bit, particularly given the potentially shaky nature of natural gas prices. In its favor, the company does have a good mix of international/domestic and onshore/offshore assets and a history of pretty decent cash flow production. Still, I can't help thinking that the shares don't offer a truly impressive risk/reward tradeoff unless you really are bullish on natural gas (and cost containment).
And so with apologies for repeating myself, I'm still a little more interested in the likes of Apache (NYSE: APA), Canadian Natural Resources (NYSE: CNQ), and Occidental (NYSE: OXY) than Devon.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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