Please ensure Javascript is enabled for purposes of website accessibility

Devon Energy Corp. Earnings: Outstanding Operations Masked by Weak Oil Prices

By Matthew DiLallo - May 5, 2015 at 6:34PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Devon Energy is also raising full-year production guidance despite the fact its cutting capex.

"It was the best of times; it was the worst of times." That really is the best way to describe the first-quarter earnings reports of most energy companies in America, Devon Energy Corp. (DVN 1.54%) included. The oil and gas driller delivered an outstanding quarter operationally, as it exceeded its production guidance for the third straight quarter. However, very weak oil prices led to a very weak showing on the financial side of things. That being said, Devon Energy is taking action in 2015 to improve its profitability, which should put the company in the position to deliver stellar results once oil prices improve.

Drilling down into the quarter
Devon Energy set a new company record for oil production, as it produced an average of 272,000 barrels of oil per day in the quarter. That was 12,000 barrels per day higher than its guidance and 55% higher than the first quarter of last year. Meanwhile, overall production averaged 685,000 barrels of oil equivalent per day, or BOE/d, which was also 12,000 BOE/d higher than guidance and 22% higher than the first quarter of last year. This was a really remarkable feat, but it was muted by exceptionally weak oil prices.

Those weak oil prices forced Devon Energy to record a loss of $3.6 billion in the quarter, which is a big reversal from the first quarter of last year, when it earned $324 million. However, the bulk of that loss was due to a non-cash charge, as the company recorded an asset impairment because of low oil prices. If we adjust for that charge, the company earned $89 million, or $0.22 per share, which still did miss analysts' consensus estimates by $0.04 per share. That miss aside, Devon reported fairly strong cash inflows, as it generated $1.6 billion of operating cash flow and received another $569 million in cash from the sale units of EnLink Midstream (NYSE: ENLK) that it sold during the quarter.

One of the reasons Devon's cash flow was so strong was that the company reduced its operating costs by 9% year over year. Most of those savings came from LOE costs, which fell by 7% over the prior year and came in 7% below the company's own guidance range. Thanks to those savings, the company now expects full-year LOE costs to be below its previous guidance, which should save the company an additional $170 million in 2015. The company costs also benefited from a 21% decline in production and property taxes as a result of lower oil and gas revenue.

A look ahead
Despite what will probably be continued weakness in oil prices, Devon Energy expects a very strong second half of the year. That's because one of the benefits of lower oil and gas prices is that it yields lower oilfield-service costs. As a result, Devon Energy expects to save $250 million on its 2015 capital budget, which represents a 6% reduction at the midpoint of its guidance.

What's absolutely remarkable is that despite this reduction in capex, Devon Energy is boosting its full-year production outlook. The company expects its oil production to grow by 25%-35% in 2015, which is a big jump from its previous outlook of 20%-25% growth in 2015. Given this outlook, Devon Energy is one of the few oil companies that's not only growing its oil production in 2015, but also accelerating that growth.

Investor takeaway
Operationally, Devon Energy is producing outstanding results, as its oil production exceeded its guidance range while the company did an exceptional job reducing its costs. This performance is giving the company the confidence to boost its full-year production guidance range even though its capex is falling. But its financials are a different story, as the company's earnings fell off a cliff because of weak oil prices. That said, once oil prices improve, Devon Energy looks like a force to be reckoned with, as its exceptional operations would generate prodigious earnings if oil prices were higher.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Devon Energy Corporation Stock Quote
Devon Energy Corporation
$57.52 (1.54%) $0.87

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.