Your profits are down 7% -- hooray! At first glance, that may seem to be the market's reaction to Oklahoma-based independent oil and gas company Devon's
Everyone was braced for an earnings hit, stemming from the combination of weakness in natural gas prices and an inflationary capital cost environment. The latter effect is particularly acute in Western Canada, where a tight labor and materials market is also troubling the likes of Suncor
Now that we've established why shares didn't get drilled today, we can talk about the big picture for Devon. In the near term, that involves the company's shifting geographic mix. Further out, I see it as a consolidation story.
Former Fool Stephen Simpson was dead on when he asserted in August that Devon was geographically overextended. In the interim, the company has sold its Egyptian assets and plans to divest all of its West African interests, including a substantial stake in ExxonMobil's
Despite the present and possible future divestitures of non-core assets, Devon will remain a geographically diverse entity. This is simply not advantageous for a mid-range E&P company. In the longer run, I don't see Devon remaining an independent company. The firm's solid production growth makes it a natural acquisition target for any major integrated firm, because of the challenging decline curves it faces. Such a company could spread the costs of Devon's operations over a much broader asset base, so consolidation would seem to be a cause for celebration all around.
For related Foolishness:
- Devon and its partners Chevron and Statoil
(NYSE:STO)have drilled deep in the Gulf, turning in satisfying early results.
- Chevron's production is still coming in flat, though.
- BP only wishes its results were flat.
Interested in what other Fools have to say about M&A in the oil patch? Get yourself on over to the Oil and Gas board!
Fool contributor Toby Shute is in the process of consolidating his belongings, in anticipation of a move to the West Coast. He doesn't own shares in any company mentioned. The Motley Fool has a disclosure policy.