Devon Energy (DVN)

[dan_s]

Devon Energy is one of our Elite Eight and it is definitely one of my Top Picks for near-term appreciation.

Devon Energy Corp. (DVN) today announced core earnings of $316 million, or $0.76 per diluted share, for the third quarter of 2015. This level of earnings generated cash flow from operations of $1.6 billion in the third quarter, a 41 percent increase compared to the second quarter of 2015.

“Devon delivered another outstanding operational performance in the third quarter,” said Dave Hager, president and CEO. “Our strategy of operating in North America’s best resource plays, coupled with a focus on delivering best-in-class execution, continues to generate top-tier results. Across our asset portfolio, well performance has consistently exceeded type curve expectations through higher production rates, declining capital costs and lower operating expenses.”

“Based on these strong results, we are raising our full-year oil production outlook for the second time this year,” Hager said. “And we are delivering this incremental production growth with significantly lower costs. We are now on pace to save around $1 billion of capital and operating costs in 2015 versus original expectations.”

Devon Energy Corp: 3Q15: Across the Board Better
Evan Calio – Morgan Stanley
November 4, 2015 3:12 AM GMT

EPS beats; production beats; 4Q15 production guidance raised; 2015 capex lowered; 2016 volumes/spend guidance on the balance is better than Consensus; and adds ~$4/sh in NAV via operations update.

Strong EPS beat driven by higher volumes and lower costs. DVN reported adjusted EPS of $0.76/sh, beating MS $0.48/sh and the Streets’ $0.53/sh. This was largely driven by headline volumes of 680Mboed, higher than 638-677Mboed guidance range, MS 659Mboed and Consensus’ 666Mboed. Realizations were generally in-line (other than Canadian gas). Operational costs were impressive across the board, lower than the low end of the guidance ranges. LOE of $8.15/boe vs. guidance of $8.90-9.40/boe was down 11% sequentially. Similarly, G&A of $3.16/boe vs. guidance of $3.40-3.70/boe down 8% QoQ. Consequently, DVN now guides FY15 cash costs to decline to $13.80/boe. See 3Q15 Results section.

Production above top end of guidance on Eagle Ford and Jackfish. Volumes at 680Mboed exceeded high end of 638-677Mboed guidance range, while beating the Streets’ 666Mboed and MS' 659Mboed. After starting off 2014 with two misses, DVN beat the top end of production guidance in 3 and mid-point in 4 of the subsequent 5 quarters. Eagle Ford was the standout vs. our expectations with a QoQ drop of less than 1% (to 113Mboed) and crude down 7% (to 62Mbld). Both significantly slower pace of decline than 12% boe and 18% crude QoQ reduction reported by BHP on October 20.

[dan_s]

Balance Sheet and Liquidity Remain Strong

Devon’s financial position remains exceptionally strong with investment-grade credit ratings and excellent liquidity. The Company exited the quarter with net debt, excluding non-recourse EnLink obligations, totaling just over $7 billion. Devon had cash balances of $1.8 billion at quarter end, and has no borrowings under its $3.0 billion senior credit facility.

[dan_s]

I have updated my forecast model for Devon. It will posted to the EPG website late today.

My Fair Value Estimate is $74.50, compared to First Call's price target of $57.21.

Good time to remind all of you that my valuations are what I think the company would sell for TODAY if it were put on the market. Obviously, Devon has some extremely valuable assets and the bidding war would draw attention from all of the majors. First Call's price targets are what analysts believe the stock will trade for within a year. Considering all of the FEAR in this market, I do think $57/share is a reasonable near-term target price.