Devon Energy Corp. (DVN) reported second-quarter 2011 adjusted EPS of $1.71, which was above the Zacks Consensus Estimate of $1.56. On a GAAP basis, the company reported an EPS of $6.48 significantly above the year-ago quarter EPS of $1.59, including a one-time gain on the sale of assets in Brazil.
Operating Results
Devon’s quarterly revenue of $3.2 billion ran past the Zacks Consensus Estimate of $2.4 billion and the year-ago revenue of $2.2 billion. The robust revenue in the quarter is attributable to improved oil, natural gas and natural gas liquids (NGL) sales, which was backed by higher production and higher oil and natural gas liquids pricing in the quarter.
During the second quarter, Devon’s net hydrocarbon production rose 2.7% to 660.1 thousand oil-equivalent barrels per day (MBoe/d).
Devon’s oil and natural gas liquids (NGL) production continued to show excellent growth in the second quarter. The company's oil production for the quarter averaged 118.4 thousand barrels of oil per day (MBbls/d), almost at par with the year-ago level.
Natural gas liquids production for the quarter was 101.6 MBbls/d, up 14.8% year over year. Oil and NGL production growth for the company’s North American onshore properties alone was 12% compared to the second quarter of 2010. Natural gas production in the quarter rose 1.1% to 2,641 million cubic feet per day (MMcf/d).
Devon’s average second quarter realized price per Boe, without the impact of hedges, increased 20.1% over the prior year to $36.63 per barrel. Excluding hedges, the company’s realized natural gas price increased 5% to $3.80 per thousand cubic feet.
Average realized oil price in the quarter showed a 33.6% growth reaching $83.31 per barrel, while realized NGL prices improved 36.6% to $42.20 per barrel.
Marketing and midstream revenue in the quarter also improved 49.1% year over year. The improvement resulted from higher natural gas liquids production and prices as well as increased gas throughput.
On the cost side, the cost efficiencies realized from Devon’s cost strategic repositioning paid off very well, with no or only modest increases in costs during the first quarter. Lease operating expenses (LOE) increased only $11 million over last year to $453 million driven by excellent cost management and higher production which offset the effects of the strengthening Canadian dollar and rising service and supply costs.
Devon’s depreciation, depletion, and amortization expense (DD&A) of oil and gas properties increased 13.8% year over year to $485 million, while general and administrative expenses increased 3.8% to $135 million. Interest expense in the second quarter decreased 24% to $85 million attributable to lower interest rates.
Financial Health
Devon maintains a healthy financial and liquidity position. Devon’s operating cash flow before balance sheet changes in the second quarter increased 115% year over year to $1.6 billion. During the quarter, Devon received $3.2 billion of pre-tax proceeds from the sale of its assets in Brazil.
As of June 30, 2011, Devon’s cash and short-term investments were $6.7 billion and its net debt to adjusted capitalization ratio declined to 5%.
Our View
Earnings of Chesapeake Energy Corporation (CHK), one of Devon Energy’s closest peers, were sharply higher compared to expectation mainly backed by a 62% expansion in liquid production volumes. The company’s earnings per share in the second quarter reached 76 cents, striding ahead of the Zacks Consensus Estimate of 72 cents.
Total revenue surged 65% year over year to $3,318 million from $2,012 million reported in the comparable period last year.
Based in Oklahoma, Devon Energy is engaged primarily in exploration, development and production of oil and natural gas. The company’s oil and gas operations are mainly concentrated in the onshore areas of North America, including the United States and Canada.
We maintain our Neutral recommendation on Devon. The company also retains a short term Zacks #3 Rank (Hold).
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