The 2 Most Important Takeaways From Devon Energy's First-Quarter Earnings

Devon Energy’s first-quarter results show that its strategy of focusing on high-margin liquids drilling is paying off in spades.

May 12, 2014 at 2:13PM

Devon Energy (NYSE:DVN), the Oklahoma City-based independent oil and gas producer, reported strong first-quarter results last week that saw adjusted earnings surge 103% year over year to $547 million, or $1.34 per share, handily beating analysts' expectations by $0.07 per share. Here are two takeaways from the company's first-quarter results that struck me as especially important.

Linn Energy Permian

Photo credit: LINN Energy LLC.

Higher oil production fueling strong margin and cash-flow growth
Devon's first-quarter performance highlighted the continuing success of its new strategy, which is focused on boosting high-margin liquids production while curtailing dry gas drilling. First-quarter oil production grew 21% year over year to average 176,000 barrels per day, led mainly by exceptionally strong growth in domestic U.S. oil production, which jumped 56% over the first quarter of last year.

As a result of this impressive growth in oil production, margins and cash flow improved dramatically. Devon's first-quarter operating margins increased by a whopping 54% year over year, which, along with improved price realizations, drove a 41% year-over-year increase in operating cash flow, which came in at $1.4 billion.

Reflecting the company's high degree of confidence in continued strong cash-flow growth, Devon boosted its quarterly cash dividend by 9% to $0.24 per share. The raise marks the company's ninth dividend increase since 2004 and represents an annual compound dividend growth rate of 23%.  

Significant free cash flow in 2015 and beyond
Devon also continues to make good progress in high-grading its portfolio through recent moves including the acquisition of oil-rich assets in the Eagle Ford, the divestment of gas-rich acreage in Canada, and the completion of its EnLink Midstream combination.

The main strategic benefit of the company's portfolio high-grading is to position it for continued high-margin oil production growth in the years ahead. While companywide oil production is set to grow by more than 30% in 2014, Devon has a number of tricks up its sleeve to ensure that oil production growth continues at a robust pace into 2015 and beyond.

Post-2015 oil production growth will be led primarily by the Eagle Ford, the Delaware Basin, and the start up of Devon's Jackfish 3 facility in Canada. For instance, Eagle Ford production volumes are expected to average more than 100,000 boe/d from 2015 onward, while 2015 net oil production from Jackfish is expected to increase 30% to a range of 62,000-67,000 boe/d. What's even better about these projects, however, is that they will usher in a period of significant free cash flow generation after 2015.

Assuming $90 WTI prices and $4.50 Henry Hub gas prices, the company's Eagle Ford operations are expected to generate more than $1 billion in annual free cash flow in 2015 and beyond, while Jackfish is expected to generate $600 million of free cash flow in 2015 and more than $1 billion in annual free cash flow through the end of the decade.

Needless to say, all this excess cash will further bolster Devon's already robust balance sheet, providing it with unparalleled financial flexibility to fund additional capital spending, pursue acquisitions, and fund dividend payments and share repurchases.

Investor takeaway
Overall, Devon turned in another fantastic quarterly performance, showcasing its continued success in growing oil production and boosting margins and cash flow, executing on value-accretive transactions, and positioning itself for continued growth in the years ahead. Though the market is slowly starting to recognize Devon's massive potential, the company still appears significantly undervalued.

Taking out the value of its EnLink securities from its enterprise value, Devon's E&P business is trading at just over 4 times EBITDA, a hefty discount to its peers. Given the company's strong prospects for oil production, earnings, and cash flow growth, combined with its fortress-like balance sheet and world-class management team, it deserves a much higher multiple.

Will this stock be your next multibagger?
While Devon looks meaningfully undervalued by many measures, there's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Arjun Sreekumar owns shares of Devon Energy. The Motley Fool owns shares of Devon Energy. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers