Devon Energy Corp (DVN 0.19%) recently reported an awful fourth-quarter, at least according to the headlines. Those headlines pointed out that the company missed analysts' estimates, reported a big loss and that it cut its capital spending by 20% in 2015. While all of this was true those headlines did mask the fact that the company's quarter was actually really strong operationally. That came out loud and clear by listening to the company's management discuss its results on its fourth-quarter conference call. Here are the five most important takeaways from that call.
Exceeded expectations without exceeding spending
CEO John Richels started off his prepared remarks by saying that the company "delivered an exceptional operational performance during the fourth quarter." He noted specifically that the company, "did a great job controlling capital costs", which enabled the company to exceed its production guidance without spending more money to do so. In fact, for the full-year the company's total production exceeded its original forecast by 4% while its capital spending was in line with its planned budget.
He then went on to point out three specific strategies that the company is using to enable it to outperform expectations. These strategies can be found on the following slide.
Source: Devon Energy Investor Presentation.
He then took a few moments to detail each of the three bullet points on the slide.
Premier and sustainable asset portfolio
Richels pointed out that,
Achieving these leading returns begins with our premier portfolio of assets located in some of the most attractive North American resource plays. This top‐tier asset portfolio positions us to deliver sustainable growth through a deep inventory of high‐rate‐of‐return drilling opportunities. Additionally, this inventory is well balanced between oil and natural gas providing us the flexibility to shift capital in response to changing market conditions.
Energy development is a lot like real estate as location is critically important. That's especially true when it comes to shale plays as the core sections of these plays offer far better returns than those found at the edges of the play. That enables a company like Devon Energy, which has focused on finding and acquiring acreage in the core of a play, to enjoy strong drilling returns even at lower oil prices. It's also the secret sauce behind the company's production outperformance as its exceptional acreage is making it easier for the company to get more out of each well without spending any more money.
Superior execution
In addition to having exceptional assets Devon Energy also executes well. Richels said that,
While having a premier portfolio is crucial, developing our world‐class assets through superior execution is equally important. Our technical teams are focused on the key drivers of outstanding operational performance, including driving down drilling times, improving completion designs and optimizing our base production performance.
Devon is focused on getting the best out of each well, which is yielding results that continue to perform above expectations. One thing the company is now doing is using two and a half times more sand as a proppant in its wells in the Permian Basin. By continuing to improve its completion designs the company was able to find a way to boost its initial production rates by 60%.
Maintain financial strength and flexibility
The final strategy is to "maintain a high degree of financial strength and flexibility" according to Richel. He noted that, "Devon's financial position remains rock‐solid with well hedged cash flows, low leverage, ample liquidity, and visible drop down proceeds" from EnLink Midstream Partners LP (NYSE: ENLK). This flexibility is rare within the industry as so any of its peers are weighed down with too much debt, which has limited their flexibility.
Speaking specifically of EnLink, later on in the call CFO Tom Mitchell noted that the company has two potential drop down candidates that it's looking to sell to its MLP with the first of the two assets expected to be dropped down later this year. Further, the company's ownership of EnLink Midstream Partners as well as its General Partner EnLink Midstream Inc (ENLC +0.00%) is currently worth $7.6 billion. The company can not only sell assets but it could also sell some of its units if it needed more cash, which gives it flexibility that few of its peers can match.
Plan for 2015
Devon Energy is really in a strong position right now. That's why it was able to lower its 2015 capital budget by 20% over last year's level while still achieving its targeted oil production growth rate of 20%-25%. That growth rate is unchanged from its previous outlook and that outcome is really the result of the company's three strategies. Because the company is in the best spots of the best plays and it's driving superior execution; Devon is able to grow just as fast as before, but while spending less money, which of course will help it to maintain its strong financial position. According to CFO Tom Mitchell, "This prudent approach to the business positions Devon to deliver attractive returns to our shareholders in the upcoming years as we execute on our business plan."
Investor takeaway
The price of oil might be down, but Devon Energy is well equipped to handle this setback. The company has some of the best oil assets in the country, which it can use to deliver decent returns even in a low price environment. Overall, the company continues to get better and is well positioned to really thrive when the price of oil begins to rebound.
