Devon Energy (NYSE:DVN) reported mixed results for the second quarter. While its high-margin U.S. oil production came in above the top end of its guidance range, earnings missed the consensus estimate as production expenses were toward the high end of its forecast. Overall, though, it was still a solid quarter for the oil company as it remained on track to achieve its full-year forecast.

Drilling down into the numbers

Metric

Q2 2018

Guidance or Expectations

Total production

520,000 BOE/D

503,000 to 525,000 BOE/D

U.S. oil production

136,000 BPD

129,000 to 134,000 BPD

Core earnings per share

$0.34

$0.36

Data source: Devon Energy. BOE/D = barrels of oil equivalent per day; BPD = barrels per day.

An oil pump.

Image source: Getty Images.

Devon Energy's overall output came in toward the high end of its forecast, driven by stronger-than-expected U.S. oil production, which helped offset some weakness in Canada due to scheduled maintenance at its Jackfish facility. Fueling Devon's strong results in the U.S. was its position in the Delaware Basin, where light oil output rocketed 54% year over year thanks to prolific well productivity. The company noted that 10 wells completed in the quarter produced an average of 3,000 BOE/D in their first month online. The company also benefited from strong drilling results in the STACK Shale play, where output jumped 26% versus last year's second quarter due to several strong wells completed during the quarter.

On the downside, Devon's production expenses were $572 million during the quarter, which was toward the top of its $530 million to $580 million guidance range and up 26% year over year. However, the company's margins improved 31% to $20.19 per BOE thanks to higher oil prices and a 3% decline in lease operating and transportation expenses in the U.S.

Devon Energy was also busy on the strategic front during the quarter. The company sold its interests in EnLink Midstream Partners (NYSE: ENLK) and EnLink Midstream (NYSE: ENLC) for $3.125 billion. That brought the company's proceeds from its current asset sale program up to $4.2 billion. Devon used $1 billion of that money to buy back its stock, retiring 5% of its outstanding shares by the end of July.

An onshore drilling rig in a green field.

Image source: Getty Images.

A look at what's ahead

Devon Energy noted in its earnings release that it still plans to sell about $1 billion of minor, non-core assets by year's end. The company expects to use that money, along with the cash from its EnLink sale, to buy back another $3 billion in stock by the end of next June. At the company's current share price, its $4 billion repurchase program would retire about 20% of its outstanding stock, which is the largest buyback in the oil industry when measured as a percentage of its market cap.

Devon also stated that it's on pace to achieve its full-year forecast to grow its U.S. oil output 16% from last year's level. Further, the company noted that it can still accomplish this goal without boosting its capital budget.

The reaffirmation of Devon's growth forecast and capex budget is worth noting given some challenges within the industry over the past few months. First, pipeline issues in the Permian Basin have forced several rivals to shift gears. ConocoPhillips (NYSE:COP) and Halcon Resources (NYSE:HK) have both dropped one drilling rig in the region because of this issue. While ConocoPhillips reallocated its activity to the Eagle Ford, Halcon had nowhere else to go. Because of that, its output won't grow as fast this year. Devon, however, doesn't expect any impact because it has contracts in place protecting the price and assuring the flow of 90% of its oil volumes this year.

The second problem that's starting to affect the industry is inflation due to steel tariffs and the increase in drilling activities. Those rising costs were one of the reasons both ConocoPhillips and Anadarko Petroleum (NYSE: APC) recently boosted their capital budgets for the year. Devon doesn't anticipate spending more money this year because, again, it has contracts that will mitigate much of the cost inflation. 

A small speed bump

Devon didn't make as much money as analysts thought it would during the second quarter. However, the company still posted solid numbers overall, including topping its guidance for U.S. oil production. That sets it up for a strong second half where it expects output to continue rising at a brisk pace, which should take earnings along for the ride. Meanwhile, the company has a needle-moving stock buyback under way, which could light a fire under the share price in the coming months. Those factors make it a top oil stock to consider buying for the second half and beyond.

Matthew DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.