Devon Energy Corp. (DVN) reported third-quarter 2011 adjusted EPS of $1.54, which was above the Zacks Consensus Estimate of $1.48.
On a GAAP basis, the company reported an EPS of $2.50 compared with the year-ago quarter EPS of $4.79, impacted by a one-time unrealized gain on oil, gas and natural gas liquids derivatives of $642 million before-tax ($415 million after-tax).
Operating Results
Devon’s quarterly revenue of $3.5 billion ran past the Zacks Consensus Estimate of $2.6 billion and the year-ago revenue of $2.4 billion. The robust revenue in the quarter was driven by a 25% increase in oil, natural gas and natural gas liquids sales, which reached $2.1 billion.
The improvement in hydrocarbon sales revenue was backed by higher overall production and improved oil and natural gas liquids (liquids) prices.
Net hydrocarbon production in the quarter rose 8% from the year-ago quarter to 661,000 oil-equivalent barrels per day (MBoe/d). This comprised a 17% increase in liquids production, which averaged 226,000 barrels per day (MBbls/d).
Separately, oil production in the quarter was up 21.5 MBbls/d to 125 MBbls/d. Natural gas liquids production totaled 101.2 MBbls/d, up 13.5% year over year. Natural gas production rose 3.3% to 2,607.7 million cubic feet per day (MMcf/d).
Devon’s average third quarter realized price per Boe, without the impact of hedges, increased 16.4% over the prior year to $34.72 per barrel.
Excluding hedges, the company’s realized oil price in the quarter showed a 13.8% growth reaching $70.89 per barrel, while realized NGL prices improved 46% to $42.35 per barrel. Average realized natural gas price increased only 2.5% to $3.76 per thousand cubic feet.
Marketing and midstream revenue in the quarter also improved nearly 42% year over year. The increase was attributable to higher natural gas liquids prices and production.
Devon’s cost performance in the third quarter continued to impress with costs coming in line with forecasts. However, the company’s costs increased compared to last year. Overall, company expenses increased 18.7% year over year to $1,964 million.
Lease operating expenses (LOE) increased $60 million (6% on per Boe basis) over last year to $475 million driven by higher industry costs and the impact of a stronger Canadian dollar. Depreciation, depletion, and amortization expense (DD&A) increased 22% year over year to $566 million, while general and administrative expenses increased only 5% to $138 million. Interest expense in the third quarter increased 25% to $104 million, mainly driven by higher average debt balances.
Financial Health
Devon maintains a healthy financial and liquidity position. Devon’s net operating cash flow before in the third quarter increased 4.5% year over year to $1.4 billion. Before balance sheet changes, the company’s operating cash flows improved 6% to $1.9 billion.
The cash generated was used to fund the company’s capital expenditure for the quarter as well as return nearly $800 million to shareholders in the form of dividends and share buybacks.
During the third quarter, the company repurchased $697 million of common stock. As of September 30, 2011, the company had repurchased $3.2 billion of stock and expects to complete its $3.5 billion stock repurchase program during the fourth quarter of 2011.
As of September 30, 2011, Devon’s cash and short-term investments were $6.8 billion and its net debt to adjusted capitalization ratio was 10%.
Our View
Earnings of EnCana Corp. (ECA), one of Devon Energy’s closest peers, reported its third quarter results on October 20, 2011. The company’s earnings of 23 cents per share in the quarter, comfortably beat the Zacks Consensus Estimate of 9 cents, reflecting higher volumes, but partially offset by low natural gas prices.
Total revenue dipped 3% year over year to $2.4 billion but was 39.5% above the Zacks Consensus Estimate.
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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