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Why Devon Energy Corp.'s Stock Is Getting Pounded Today

By Matthew DiLallo - Feb 21, 2018 at 4:49PM

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The shale driller missed expectations by a wide margin.

What happened

Shares of Devon Energy Corp. (DVN -1.77%) tumbled on Wednesday and were down more than 11% at 2:45 p.m. EST. Driving the downdraft was the shale driller's disappointing fourth-quarter report.

So what

Devon Energy reported core earnings of $199 million, or $0.38 per share, for the fourth quarter; that was a stunning $0.25 per share below analysts' expectations. The main issue was that Devon Energy's oil production came in 14,000 barrels per day below the midpoint of its guidance.

Two factors fueled the miss. First, 50 wells operated by Devon's partners didn't come online when the company expected during the quarter, which pushed their output into early 2018. Second, the company had to complete some unplanned maintenance at its Jackfish oil sands facility in Canada, which curtailed 5,000 barrels per day during the quarter.

A pump jack with an orange sunset

Image source: Getty Images.

Meanwhile, Devon's outlook underwhelmed. Not only did the company issue production guidance that was below analysts' expectations, but it also didn't join many of its shale-producing peers in announcing increased cash returns to investors via a higher dividend or share-buyback plan. Instead, Devon said that it wanted to pay off another $1.5 billion in debt before it started sending money back to investors above its current dividend.

That said, the company noted that its "2020 Vision" has it on pace to generate $2.5 billion of excess cash through 2020, and it could sell up to $5 billion of noncore assets, positioning it for a significant increase in cash returns to investors in the coming years.

Now what

While disappointing, Devon's fourth-quarter miss was largely due to issues beyond its control, and both were temporary. Meanwhile, the company's decision to remain ultraconservative by paying down more debt first isn't a bad idea, given what the industry has gone through in recent years. That's why today's sell-off looks like a potentially fantastic buying opportunity for patient investors: This oil stock has reached an inflection point, and is on pace to start creating meaningful value in the next few years as it delivers on its vision.

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