The third quarter was a tough one for oil producers after the price of crude dropped more than 20% over the prior quarter. However, despite that backdrop, Devon Energy (NYSE:DVN) managed to deliver an "outstanding operational performance in the quarter," according to CEO Dave Hager. To accomplish this feat, which few of its peers have matched, the company benefited from smart hedging, strong cost reductions, and record oil production.
Drilling down into the numbers
Devon Energy reported core earnings of $316 million, or $0.76 per share, which was only slightly lower than the $320 million, or $0.78 per share, it earned in the prior quarter. Cash flow from operations was even stronger at $1.6 billion, which was 41% higher than last quarter.
Fueling the strong results was the trio of levers that Devon pulled to help it offset weak oil prices. First, more than 70% of its production was hedged during the quarter, which added a full $10 per barrel of oil equivalent, or BOE, to the company's realized price during the quarter. On top of that, the company's operating expenses were down 18% year over year to $9.59 per BOE, which was below its guidance. Finally, production was 680,000 BOE/d during the quarter, which exceeded the top end of its guidance range by 4,000 BOE/d and is up 6% year over year. Moreover, the bulk of its growth was fueled by higher margin oil production, which jumped 31% year over year. This marked the fifth straight quarter that the company delivered record oil production that exceeded its own guidance.
A look ahead
Devon Energy expects that its outstanding performance will continue. In fact, the company is raising its 2015 oil production guidance by 2% at the midpoint and now expects to deliver 31% to 33% year-over-year oil production growth. Further, the company is raising its overall production growth forecast to a range of 8% to 10%.
However, it is driving this stronger growth while at the same time reducing its capex budget. The company now expects to spend $100 million less than its prior guidance, which will bring spending down to a range of $3.8 billion to $4 billion. So far this year Devon Energy has reduced its spending guidance by $500 million from its initial expectations in February.
The U.S. oil industry has really experienced a dramatic reduction in well costs this year, which is enabling oil and gas companies to produce more oil than initially expected. For example, both Pioneer Natural Resources (NYSE:PXD) and Newfield Exploration (NYSE: NFX) recently joined Devon in increasing 2015 production growth guidance without increasing capex spending. Pioneer Natural Resources increased its guidance from 10%-plus year-over-year growth to 11%, while Newfield Exploration bumped up its production forecast from a range of 53,500 to 55,000 BOE/d to a range of 55,300 to 55,800 BOE/d.
However, there is one subtle difference between these two and Devon. Both Pioneer Natural Resources and Newfield Exploration reiterated their capex budgets at $2.4 billion and $1.4 billion, respectively, while Devon Energy shaved a little bit off its budget. In other words, Devon is producing more oil and gas for less money while its peers are producing more for the same amount budgeted. A subtle difference, but it suggests that Devon Energy is doing an even better job of capturing cost savings during the current environment.
Given the context of more than a 20% plunge in oil prices during the quarter, Devon Energy turned in an exceptional quarter. The company focused on what it could control -- hedging its production, reducing its costs, and delivering better well performance -- to drive a strong operating and financial results. It's really on a roll right now and expects to finish the year strong, even if oil prices don't improve.