Devon Energy Corp. (DVN) reported third-quarter 2014 adjusted earnings per share of $1.34, surpassing the Zacks Consensus Estimate of $1.27 by 5.5%.
Earnings were 4% higher than the year-ago quarter on better cost management and higher sales volume.
On a GAAP basis, the company reported earnings of $2.47 per share compared with $1.05 per share in the year-ago quarter. The difference between the operating and GAAP number in the reported quarter was due to fair value changes in financial instruments amounting to $1.13 in addition to restructuring costs.
Revenue
Devon’s quarterly revenues of $5,336 million soared 96.6% from $2,714 million in the year-ago quarter and surpassed the Zacks Consensus Estimate of $4,287 million by 24.5%.
The upside was due to a whopping 289.1% year-over-year increase in marketing and midstream revenues to $2,000 million.
Highlights of the Release
Devon’s total production of oil, natural gas and natural gas liquids (retained assets) averaged 640,000 barrels of oil equivalent (Boe) per day in the third quarter of 2014. The production in the reported quarter exceeded the year-ago level by 18.9%.
The increase in oil production from the Permian Basin and Eagle Ford assets helped boost overall production. Devon’s domestic oil production increased 77% year over year, which is the primary reason behind the surge.
In the reported quarter, Devon’s operating profit was $1,774 million, exceeding the year-ago profit by 137.9%.
Total operating expenses in third-quarter 2014 increased 79.8% to $3,562 million from $1,981 million in third-quarter 2013. However, total expenses as a percentage of total revenue was 66.7% in the reported quarter as against nearly 73% a year ago. This had a positive impact on margins.
Realized Prices
Realized oil prices in the quarter were $80.31 per barrel, down 7.2% from $86.51 per barrel in the year-ago quarter. Realized prices for natural gas liquids were down 1.3% to $25.91 per barrel from $26.25 per barrel in the year-ago quarter.
Natural gas price realization was up 14.8% year over year to $3.72 per thousand cubic feet (Mcf) from $3.24 per Mcf in the year-ago quarter.
On the whole, total realized prices in the third quarter were $41.99 per boe, up 14.3% year over year.
Financial Health
As of Sep 30, 2014, the company’s cash balance totaled $3.41 billion compared with $6.06 billion as of Dec 31, 2013.
Long-term debt as of Sep 30, 2014, was $10.16 billion, up from $7.96 billion as of Dec 31, 2013. The company was however able to lower its debt from the preceding quarter.
Capital expenditure in third-quarter 2014 was nearly $1.54 billion. Devon generated cash flow from operations of $5 billion in the first nine months of 2014, up 25.5% year over year.
Guidance
Devon Energy expects total production in the fourth quarter to be in the range of 630,000–635,000 Boe per day.
Capital expenditure in the final quarter of 2014 is expected to be in the range of $1,590–$1,760 million.
Other Company Releases
Anadarko Petroleum Corporation (APC) reported third-quarter 2014 adjusted earnings of $1.16 per share, missing the Zacks Consensus Estimate of $1.30 by 10.8%
Midstates Petroleum Company (MPO) posted net earnings of 29 cents per share in third-quarter 2014, surpassing the Zacks Consensus Estimate of 8 cents by 262.5%.
LRR Energy, L.P. (LRE) reported third-quarter 2014 adjusted earnings of 48 cents per unit, beating the Zacks Consensus Estimate of 29 cents by 65.5%
Our View
Despite the slide in global oil price, Devon was able to surpass expectations, thanks to solid production from its high quality assets and an improving gas price picture.
Devon’s strategy to divest non-core assets in the U.S. and Canada and focus on the reserve rich onshore U.S. assets is yielding results. As in the second quarter, the retained North American assets of the company have contributed to its strong third-quarter performance.
Devon is also working towards reducing its debt, using the proceeds from non-core asset sale. Long-term debt at the end of the third quarter was lower than the prior quarter and it is expected to come down further. We believe Devon’s cash flow generating capacity along with declining debt will further strengthen its financial position.
Devon Energy currently holds a Zacks Rank #3 (Hold).
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