"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. (NYSE:DVN) 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.
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.