Devon Energy Corp. (NYSE:DVN) reported its second-quarter results after the closing bell on Tuesday. Despite the persistently weak oil market, Devon's results were exceptional, as the company made significant progress reducing costs. That's giving the company the confidence to reiterate its full-year production growth guidance.
A look at the numbers
Devon Energy reported core earnings of $320 million, or $0.78 per share. That performance made analysts look foolish, as it beat the consensus estimate by $0.36 per share. Meanwhile, earnings were well above last quarter, when the company earned only $89 million, or $0.22 per share. Fueling the better-than-expected bottom-line result was the company's improved production and reduced operating costs.
Production for the quarter averaged 674,000 barrels of oil equivalent per day, or BOE, which was 9% higher than the year-ago quarter. Fueling this surge was the company's oil production, which jumped 32% to 270,000 barrels per day. That result was 5,000 barrels per day more than the company expected, marking the fourth straight quarter that oil production exceeded guidance. The biggest driver of this growth was the company's two core U.S. shale plays, as production in the Eagle Ford soared 75% over the year-ago quarter, while Delaware Basin production jumped 40% year over year. The company's oil-sands assets also delivered strong production growth, up 27% year over year thanks to the continued ramp-up of the Jackfish 3 facility.
In addition to that stronger-than-expected oil production, Devon Energy whittled down costs, which really helped to drive earnings and cash flow. The company was able to drive an 8% decline in its operating costs, pushing those down to $11.05 per BOE. Meanwhile, general and administrative costs declined by 16% to $3.45 per BOE compared with the first quarter and came in below the low end of the company's guidance range.
Having said all that, Devon Energy wasn't immune to the persistently weak oil and gas prices. That weakness forced the company to record non-cash asset impairment charges totaling $4.2 billion, resulting in a reported GAAP loss of $2.8 billion, or $6.94 per share for the quarter. Further, operating cash flow dropped nearly 50% to $1.1 billion in the quarter. However, neither is all that surprising, nor is there too much of a concern, as both could be corrected by a combination of further cost reductions and rising oil and gas prices.
A look at the outlook
Those weaknesses aside, Devon Energy delivered an exceptionally strong quarter operationally, which it expects to further improve upon in the coming quarters. Devon Energy is now on pace to drive its operating costs to be $400 million lower, on an annualized basis, than its previous guidance. Further, the company expects its capex budget to be $350 million lower than its original guidance, after finding another $100 million in cuts primarily in midstream and corporate spending. Meanwhile, the company is leaving is production guidance unchanged, as it still expects to grow its oil production by a robust 25%-35% this year, with overall production up 5%-10%.
Devon Energy's operations were exceptional this quarter. The company not only produced more oil than expected but is also doing so for less money. It expects those trends to continue, as it anticipates being able to extract even more cost reductions through the balance of the year, which should further improve its overall profitability and cash flow. The great unknown remains the oil price, which has been weakening in recent weeks and has the potential to wipe out a lot of Devon's operational gains.