Earnings or Elections, What’s Crushing Devon Energy?

Shares of Devon Energy (NYSE: DVN  ) tumbled more than 7% today, thanks to a combination of post-election hysterics and a miss on analyst estimates for the quarter. A prudent investor would look at this drop to see whether it's really a problem for the company -- or a great opportunity to invest.

Panic at the polling booth
There's a perception within the oil and gas industry that the re-election of President Obama will weaken the industry, and that these companies will struggle to be profitable. It is difficult, though, to see how this presidential administration will have such a detrimental effect on Devon's operations. Devon concentrates its production on two major sectors, natural gas and oil sands. Even though oil sands could see some environmental regulation, almost 60% of the company's oil sands production comes from Canada.

What about natural gas? The current administration has sponsored two initiatives which encourage the use of natural gas: the excise tax credit for LNG producers, and the Natural Gas Act. The excise tax credit provides a credit of $0.50 per gallon-gas-equivalent of natural gas sold for vehicle use. The Natural Gas Act would give tax incentives for companies that look to build out natural gas infrastructure, or purchase natural gas vehicles for fleets. The latter legislation has been hung up in Congressional committees, but the administration supported both this act and other forms of legislation advocating the same idea. This should encourage investors

Why earnings can be misleading
Perhaps it wasn't the election results that sent shares reeling but, instead, the losses that the company posted in the quarter. Devon's net loss of $719 million, $1.80 per share, comes off of two straight quarters of better-than-expected earnings. Before investors write this off as an unsuccessful quarter, though, a deeper look into the numbers show a much more promising tale for Devon.

The company's $1.7 billion in sales this quarter was an 18% drop year over year, but Devon increased total oil-equivalent barrel production by 3%. Furthermore, the company dropped operating costs by 2% in comparison to Q2 this year through increased production efficiency.

Much of the losses for this quarter came from the company's $1.1 billion dollar asset write-down during the quarter. The value of reserves on the company's book is based on oil and gas prices. With low gas prices right now, Devon needed to adjust for that on its books. When oil and gas prices go up, though, these assets will increase in value, and will be re-evaluated.

Both of these elements are a result of low oil and gas prices. With prices rising across the board, expect Devon to return to profitability soon.

What a Fool Believes

Company

Operating Margin

Expected 5 yr EPS growth

P/E

Share price drop since election to publish

Devon Energy

41.89%

5.2%

9.35

8.91%

Encana (NYSE: ECA  )

(6%)

(43.4%)

32.22

5.79%

Chesapeake Energy (NYSE: CHK  )

12.94%

8.45%

N/A

6.69%

Ultra Petroleum (NYSE: UPL  )

41.28%

5.99%

N/A

5.4%

Marathon Petroleum (NYSE: MPC  )

5.03%

12.33%

7.54

4.23%

Source: Yahoo! Finance

If there is one takeaway from this table, it's that the market panics don't have any true bearing on business fundamentals. More attractive investments, like Devon, can lose more than laggards like Chesapeake or Encana. Don't be misled by spikes and dips in share price. These types of movements are just noise for long-term investors. If you were to sell off shares during this dip, you would be missing out on one of the best performing companies within the independent oil and gas space.

With so much momentum behind the possibility of North American energy independence, several oil and gas companies are set to explode.  We, at the Motley Fool, keep a keen eye out for opportunities in this sector, and our analysts have identified The One Energy Stock You'll Ever Need.  To get a free report describing this company's prospects, click here.


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