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Devon Energy Delivered Another Gusher in Q2

By Matthew DiLallo – Aug 7, 2019 at 9:17AM

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The oil and gas producer easily overcame volatile commodity prices during the quarter.

Devon Energy (DVN 2.62%) followed up its excellent first-quarter results with another strong showing during the second quarter. The oil and gas producer rode robust drilling results in the Delaware Basin to deliver guidance-crushing production. That enabled it to easily outpace analysts' earnings expectations despite volatile crude prices during the quarter. The company's high-end results allowed it to boost its full-year production guidance once again even as it trimmed its outlook for capital spending.

Drilling down into the numbers

Metric

Q2 2019

Guidance or Expectations

Difference (at midpoint)

U.S. oil production

142,000 BPD

134,000 to 141,000 BPD

5,000 BPD

Core earnings per share

$0.43

$0.37

$0.06

Data source: Devon Energy. BPD = barrels of oil per day.

Devon Energy's oil production came in above the top end of its guidance range and was up 13% from last year. The main driver was the company's position in the Delaware Basin, where output surged 58% year over year. Helping fuel that growth were the 28 wells the company brought online in the quarter, which produced an average of 2,100 barrels of oil equivalent per day during their first month online.

The company also delivered strong results in the Powder River Basin, where total production jumped 28% year over year. Devon expects this trend to continue, projecting that its oil output in the region will grow 50% by year-end.

Devon complimented that growth by continuing to reduce costs, which fell 22% on a per-unit basis compared to where they were during last year's first quarter. Those two factors enabled Devon to generate $623 million of operating cash flow during the quarter, a 23% jump from the year-ago period. That allowed the company to completely fund its capital expenses and still produce $59 million of free cash flow.

It used that money and its cash on hand to continue buying back shares. The oil producer has now spent $4.4 billion on share repurchases, which have reduced its outstanding share count by 24%. That has the company on track to complete its industry-leading $5 billion repurchase plan by year-end.

Meanwhile, Devon completed the sale of its Canadian assets during the quarter. The company received $2.6 billion in that sale, which it used to pay down debt. As a result, its leverage ratio is down to just 0.8 times, which is among the lowest levels in the sector.

An oil pump with a bright sunset in the background

Image source: Getty Images.

A look at what's ahead

Devon's expectation-beating production results have it on track to produce more oil than it initially anticipated. That gave it the confidence to boost its full-year outlook for the second time this year. The company now expects its U.S. oil output to rise 19% this year, well above its initial view that it would grow 15%.

At the same time Devon is boosting its production outlook, it's also reducing its capital expense guidance range by $50 million to between $1.8 billion and $1.9 billion. Efficiency gains are driving that decline. Meanwhile, the company is also reallocating $50 million from the STACK region of Oklahoma to its Delaware and Powder River Basin areas to further optimize returns.

Devon still has at least one more asset sale to complete as part of its transformation to a U.S. oil growth company. It's currently marketing its gas-focused Barnett shale assets and expects to receive bids by the end of the current quarter. The company intends to use the proceeds to further strengthen its financial profile.

Devon's strategy continues paying dividends

Devon once again demonstrated that its pivot toward oil is the right strategy. The company's wells in the oil-rich Delaware Basin continue to outperform expectations, which is enabling it to generate lots of cash. It's returning a growing portion of that money to shareholders as part of its plan to create long-term value.

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

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