Why Devon Energy Is Selling $1 Billion in Assets

Selling revenue-generating operations sounds like a bad idea, but for this energy company, it's all part of the plan.

Nicholas Rossolillo
Nicholas Rossolillo
Jun 4, 2017 at 8:21AM
Energy, Materials, and Utilities

During its first-quarter 2017 earnings report, Devon Energy (NYSE:DVN) announced that it would be selling $1 billion in assets. That may sound foreboding, especially considering the company recently sold off several billion already last year, but it's a move in line with the strategy of lowering costs and refocusing production.

Devon's Q1: The raw numbers

Devon Energy had a great first quarter. Revenue was up from last year, and the bottom line is now solidly in the black after a tough couple of years.

Metric Q1 2017 Q1 2016
Oil production (barrels of oil equivalent per day) 563,000 685,000
Revenue $1.3 billion $825 million
Net earnings $579 million ($3.5 billion)

Data source: Devon Energy.

The price of oil is certainly helping, as the price of a barrel of crude has nearly doubled over the past 12 months. 

DVN Revenue (TTM) Chart

Data by YCharts.

The big takeaway, though, is that Devon Energy is doing more with less: the "more" being profits and the "less" being production. That is increasingly important as oil prices are largely expected to be capped at about $55 a barrel through 2018, according to a recent U.S. Energy Information Agency report.

What is and what was for sale

With prices expected to stay lower for longer, Devon has responded by focusing on operating costs and shifting focus to its most profitable projects. The $1 billion in sales furthers those efforts. The targeted locations are in the Barnett Shale region of Texas, and sales are expected to be completed in 12 to 18 months.

This $1 billion plan follows on the heels of $3.2 billion in sales that were completed last October. Assets offloaded included pipelines and upstream exploration and production projects that were deemed no longer necessary for the company. The proceeds were used to bolster the balance sheet during the worst of the oil downturn and reinvested into Devon's most promising projects.

A map of North America showing key areas of operations. The recent sales in the Barnett Shale region of Texas are highlighted.

Devon Energy operations. Recently announced asset sales are in the Barnett Shale area. Image Source: Devon Energy.

At the core of that reinvestment strategy are the STACK and Delaware Basin projects in Oklahoma, Texas, and New Mexico. CEO Dave Hager had this to say about the impact those areas are having on strategic sales: "The successful resource expansion in our world-class STACK and Delaware Basin assets has generated an abundance of opportunities within our portfolio. Given the multi-decade growth platform these franchise assets provide, we are taking this initial step to bring value forward from non-core assets and sharpen our focus on the highest-returning growth inventory in our portfolio."

What does that mean? Basically, Devon Energy's locations in STACK and the Delaware Basin have higher profit potential, even while oil prices remain low, and provide enough room for expansion for years to come. As a result, other areas on the map can be axed and the proceeds plowed back into the home turf in Texas and Oklahoma.

Bring on the divestitures

A few years ago when oil prices were upwards of $100 a barrel, the name of the game was producing as much as possible. With prices stubbornly staying under the $55 ceiling, Devon can still win by continuing to lower the average cost of production and getting rid of superfluous assets that don't help with that strategy. The company expects to continue lowering its overhead and production costs through the year while simultaneously increasing production a projected 13% to 17%.

Along the way, don't be surprised to see Devon announce more sales of non-core assets.