Devon Energy Q3 Results

[dan_s]

Updating my forecast model now. This has been a year of major transactions for Devon. They have a lot of upside in the STACK and Delaware Basin.

OKLAHOMA CITY--(BUSINESS WIRE)-- Devon Energy Corp. (NYSE: DVN) today reported operational and financial results for the third quarter of 2016 and provided guidance for the fourth quarter of 2016.

Highlights
• Achieved record-setting well results in U.S. resource plays
• Increased STACK production 38 percent year over year
• Decreased lease operating expenses 37 percent from peak rates
• Expected cost savings to reach $1 billion in 2016
• Completed $3.2 billion asset divestiture program
• Repurchased $1.2 billion of debt

“Devon delivered an outstanding operational performance in the third quarter,” said Dave Hager, president and CEO. “Our development programs generated the best quarterly drill-bit results in Devon’s 45 year history. These prolific well results were centered in the STACK play, where production increased by 38 percent. We also continued to achieve significant cost savings in the quarter and we are on pace to reduce operating and G&A expenses by $1 billion in 2016.”

“In addition to our strong operating performance, we were able to successfully complete our $3.2 billion divestiture program,” Hager said. “These accretive transactions strengthened our investment-grade position and significantly reduced our leverage from earlier this year. This improved financial strength allows us to further accelerate investment in our best-in-class U.S. resource plays, led by the STACK and Delaware Basin.”

Operating cash flow reached $726 million in the third quarter, a 117 percent increase compared to the second quarter of 2016. Combined with proceeds received from the sale of non-core assets, Devon’s total cash inflows for the quarter reached $2.4 billion.

Devon’s reported net earnings totaled $993 million or $1.89 per diluted share in the third quarter. These earnings results were impacted by certain items securities analysts typically exclude from their published estimates, with the most significant of these items being $1.4 billion in gains related to U.S. asset sales. Excluding these gains and other adjusting items, Devon’s core earnings were $47 million or $0.09 per diluted share, exceeding consensus analyst estimates.

Devon’s core earnings calculation in the third quarter was negatively impacted by an $85 million, non-cash tax charge. Excluding this charge, the company’s core earnings would have been $0.16 per share higher, further widening the margin of outperformance versus analyst expectations.

[dan_s]

Devon should be in great shape entering 2017 now that their non-core asset sales are in the rearview mirror. They can now focus on developing STACK and their other core areas.

I have updated my forecast/valuation model and it will be posted to the EPG website later today.

I have increased my valuation by $2.00/share to $63.00. This compares to First Call's price target of $48.01.

If you are not familiar with Devon, I highly recommend you get up to speed by taking some time to go through their October slide presentation. Focus on the incredible running room they have in STACK. They will have six rigs running in STACK in Q4 and my guess is that they will take that up to ten rigs in 2017. At today's oil price the well level economics are good in STACK. At $60 oil they are fantastic.

Devon also has a lot of running room in the Delaware Basin and the Eagle Ford.