Devon Energy Corp (NYSE:DVN) continues to defy the oil market downturn as its second-quarter report absolutely crushed analysts' expectations. The company is now under new leadership: Dave Hager took over as CEO at the beginning of August. Because change can be unnerving, he took time on the company's second-quarter conference call to update the investment community on what to expect going forward under his leadership, leaving the following five key takeaways.
1. Our strategy is unchanged
Hager led off his commentary saying that:
I want to be clear, the overall strategy that has led to this differentiating performance remains unchanged. We will continue to operate in North America's best resource plays, deliver superior execution, and maintain a high degree of financial strength.
Hager wanted to make sure investors know that he plans to continue moving forward with the same strategy that has worked for Devon Energy during the past few years. The company will continue to be a North American-focused company that delivers top-tier operational performance without sacrificing its financial strength. In other words, nothing's broke, so he's not going to mess with what's been working.
2. Our operations were really strong
He then broke apart the three components of Devon's winning strategy, first focusing on its North American operations. He said that the company will:
Continue to achieve significant operational improvements across our entire asset portfolio. In our three most active plays, the Delaware Basin, Eagle Ford, and the Anadarko Basin, we delivered outstanding well performance that exceeded type‐curve expectations during the quarter. Importantly, these productivity gains were attained along with substantially lower well costs and reduced operating expenses.
More specifically, for the fourth-consecutive quarter, Devon Energy was able to grow its oil production above its own guidance, delivering 32% year-over-year growth, while its operating costs fell 8%. This combination of stronger-than-expected production and lower costs are really what fueled the company's better-than-expected profitability and cash flow during the second quarter.
3. We expect these strong results to continue
Hager continued by saying that:
We expect this outstanding operational performance to continue. Our top‐tier assets are positioned in North America's best resource plays and our technical teams are laser focused on getting the most out of our properties with superior execution. This unwavering pursuit of excellence means we will continue to improve drilling times, maximize value per well with industry leading completion designs and further optimize base production with best‐in‐class field operations.
Devon Energy isn't planning on slowing down its efforts to get better. The company continues to push forward on new completion designs that are driving increased production and higher returns out of each well. This is allowing the company to get more production for fewer capital dollars, which is a key to generating solid returns in a low-oil-price environment.
4. We have one of the strongest balance sheets in the industry
One of the differentiating factors between Devon Energy and other North American energy companies, particularly those focused on shale development, is its strong balance sheet. Hager discussed the company's balance sheet by walking investors through the following slide:
He said that:
Devon's world‐class operations are backstopped by one of the strongest balance sheets in the E&P space. We have strong investment‐grade credit ratings with ample liquidity, we are well hedged for the remainder of the year and our financial strength is further enhanced by the unique optionality EnLink [Midstream Partners(NYSE:ENLK)] provides. This advantaged capital structure allows us to consistently invest in our high‐return areas and preserve operational continuity while keeping capital investment in‐ line with total cash inflows.
While many of Devon's peers are focused on improving their balance sheets during the downturn, that's not an issue for Devon. Instead, the company can use that advantage to focus on improving its returns as it can continue to invest in better wells. Further, the company has a lot of optionality if it needs more capital, as it can continue to drop down assets to EnLink Midstream, or even monetize its $5 billion equity position. That's a capital source that few of its peers can match.
5. We don't yet have guidance for 2016
The last thing Hager wanted its investors to know was the company's initial thoughts on what 2016 will bring. He said that:
We are in the very early stages of working through our planning process for 2016, I cannot provide any specific guidance for production or capital today. However, I can tell you that with the challenging industry conditions, we are keenly focused on maintaining our flexibility when it comes to our capital programs next year... once commodity prices and costs sufficiently adjust to reward increased investment, we are prepared to accelerate our drilling programs and generate differentiating growth for our shareholders.
In other words, the company's crystal ball is pretty clouded at the moment. Because of this, the company's current thinking is that it will continue to roughly match capex with cash flow until there's more clarity on an improvement in the oil price. Once prices show signs of improvement, Devon Energy stands ready to accelerate growth.
The underlying core message of Hager's comments is that Devon Energy plans to continue to focus on drilling the best wells it can while maintaining is strong balance sheet. Once prices improve, the company has the balance sheet to really accelerate growth as it could, for example, monetize its EnLink Midstream position to drill more wells.
Devon remains among the best-positioned companies to capture the upside to higher oil prices whenever that day comes.