Devon Energy Corp. (DVN) reported first-quarter 2011 adjusted EPS of $1.34, which was above the Zacks Consensus Estimate of $1.30. On a GAAP basis, the company reported an EPS of 97 cents significantly below the year-ago quarter EPS of $2.66, impacted primarily by one-time items relating to non-cash, unrealized loss on oil, gas and NGL derivatives.
Operating Results
Devon’s quarterly revenue of $2.15 billion fell short of the Zacks Consensus Estimate of $2.22 bllion and the year-ago revenue of $3.22 billion. The decline in revenue is attributed to lower natural gas prices which more than offset the production increases in the quarter.
During the first quarter, Devon’s net hydrocarbon production increased by 1.4% to 628.8 thousand oil-equivalent barrels per day (MBoe/d), despite curtailments related to the severe winter weather, growing production from its North American onshore properties by 7% compared to last year. Production growth in the first quarter resulted from better-than-expected results from several core properties, including the Cana-Woodford and Barnett Shale.
Devon’s oil and natural gas liquids (NGL) production continued to show excellent growth in the first quarter, recording a growth of 2.8% year over year to 206.6 thousand barrels of oil per day (MBbls/d). Oil and NGL production growth for the company’s North American onshore properties alone was 11% compared to the first quarter of 2010. Natural gas production in the quarter rose only 0.6% to 2,533 million cubic feet per day (MMcf/d).
Although production increased, revenues from oil, gas and natural gas liquids sales showed a 10% decline to $1.9 billion in the quarter, due to lower natural gas prices.
Devon’s average first quarter realized price per Boe, without the impact of hedges, declined 11% over the prior year to $32.86 per barrel. Excluding hedges, the company’s realized natural gas price decreased 25% to $3.62 per thousand cubic feet. Average realized oil price in the quarter showed a 5% growth reaching $70.95 per barrel, while realized NGL prices improved 4% to $37.39 per barrel.
Marketing and midstream revenue in the quarter also dipped 14% year over year. However, increased gas throughput and strong cost control drove the segment’s operating profit to $122 million.
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 $10 million over last year to $424 million driven by excellent cost management along with the divestiture of higher-cost offshore assets and the strengthening of the Canadian dollar.
Devon’s depreciation, depletion, and amortization expense (DD&A) of oil and gas properties increased 4% year over year to $442 million, while general and administrative expenses declined 6% to $130 million driven by lower employee costs and efficiencies gained from the company’s strategic repositioning. Interest expense in the first quarter decreased 6% to $81 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 first quarter increased 4% year over year to $1.5 billion. The company utilized this cash flow and liquidity provided from asset sales to fund its total capital program and return nearly $800 million to its shareholders in the form of stock buybacks and dividend payments.
As of March 31, 2011, Devon repurchased nearly 26.4 million shares for a total cost of $1.9 billion. Devon expects to complete the stock repurchase program by the end of 2011.
Devon’s cash and short-term investments at the end of the first quarter were $3.4 billion, with a net debt to adjusted capitalization ratio of 15%.
Our View
Earnings of Apache Corp. (APA), one of Devon Energy’s closest peers, were solid mainly on increased volumes and higher realized oil prices. The company’s earnings per share in the first quarter reached $2.90, comfortably surpassing the Zacks Consensus Estimate of $2.61 and way above the year-ago adjusted profit of $2.10. Revenues of $3,925.0 million also increased 46.8% from first quarter 2010 and beat our projection by 8.8%.
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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