Devon Energy Forecast

[dan_s]

Devon Energy is a complex company and more difficult to forecast than the majority of the Sweet 16. 2016 was a "transition year" with lots of asset sales to shore up their balance sheet. If Q4 2016 is a good indication of what's coming in 2017, then this is going to be a very good year for DVN. STACK will be the "engine of growth". Nice that it is near their OKC headquarters.

The majority of the company’s production was attributable to its U.S. resource plays, which averaged 396,000 Boe per day during the fourth quarter (73.5% of total DVN production). Production within the U.S. during 2016 benefited from drilling activity that achieved the best new well productivity in Devon’s 45-year history. Led by results from the STACK, Delaware Basin and Eagle Ford assets, the company’s initial 90-day production rates in the U.S. increased for the fourth consecutive year, advancing more than 300 percent from 2012.

The substantial improvement in well productivity was driven by activity focused in top resource plays, improved subsurface reservoir characterization, leading-edge completion designs and improvements in lateral placement.

On Oct. 6, 2016, the company closed on the sale of its 50 percent interest in the Access Pipeline for USD $1.1 billion. This accretive transaction officially completed Devon’s $3.2 billion non-core asset divestiture program.

The majority of divestiture proceeds were utilized to retire $2.5 billion of debt through tender offerings and repayments in the second half of 2016. As a result of the debt-reduction efforts, the company expects its recurring, go-forward financing costs to decline by around $120 million annually, with no significant debt maturities until mid-2021. Devon exited the fourth quarter with investment-grade credit ratings and significant liquidity, which consisted of $2 billion of cash on hand and an undrawn credit facility of $3 billion.

In addition to an investment-grade balance sheet, Devon’s financial position is bolstered by a significantly increased commodity hedging position in 2017. The company currently has approximately 50 percent of its estimated oil and gas production hedged in the upcoming year and will continue to build out its hedging position in the future.

In 2017, Devon expects to further accelerate activity in its U.S. resource plays to as many as 20 operated rigs by year end. With this level of planned activity, the company expects to invest between $2.0 billion and $2.3 billion of E&P capital in 2017, with nearly 90 percent of the capital devoted to U.S. resource plays.

Devon’s upstream capital plans are expected to drive 13 to 17 percent oil production growth in the U.S. during 2017 compared to the fourth quarter of 2016, which marks the low point of Devon’s production profile. This resumption of growth in high-margin production will begin in the first quarter of 2017. The operational momentum created by accelerated drilling activity in the STACK and Delaware Basin in the upcoming year is expected to advance light-oil production in the U.S. by approximately 20 percent in 2018 compared to 2017. This rapid growth in high-margin production, combined with a significantly improved cost structure, positions Devon to deliver peer-leading cash flow expansion at today’s market prices.

[dan_s]

Devon's share of EnLink Midstream Partners (ENLC and ENLK) net income is consolidated in their income statement as "Marketing and Midstream Revenues and Expenses:

EnLink grew rapidly during 2016 and is expected to grow more in 2017. EnLink will have a big impact on Devon's reported earnings and cash flows.

From yesterday's press release:
EnLink Positioned to Deliver Double-Digit Growth in 2017

Devon’s midstream business generated $212 million of operating profit in the fourth quarter, driven entirely by the company’s strategic investment in EnLink Midstream. For the full-year 2016, EnLink-related operating profit expanded to $879 million, a 6 percent improvement compared to 2015.

In 2017, with strong growth expected from EnLink, Devon projects its midstream operating profits will advance to a range of $900 million to $950 million. Based on the midpoint of guidance, this estimate represents approximately a 10 percent increase compared to 2016. EnLink’s growth is derived from an asset base that is positioned in some of the most attractive markets in North America, including the STACK, Midland Basin, Delaware Basin and an NGL business that services end-user demand along the Gulf Coast.

Devon has a 64 percent ownership in EnLink’s general partner (ENLC) and a 24 percent interest in the limited partner (ENLK). In aggregate, the company’s ownership in EnLink has a market value of approximately $4 billion and is expected to generate cash distributions of around $270 million annually.

[dan_s]

I have finished updating my forecast model for Devon Energy and it will be posted to the EPG website this afternoon. As I posted earlier, Devon has a lot of moving parts and is therefore much more difficult to forecast. That said, the company provided more detailed guidance which really helps.

My valuation remains $64.00 / share, compared to First Call's price target of $53.11.

It probably deserves a higher multiple of operating cash flow than I am using, but I want to see a couple quarters of rising production first. Devon will be ramping up to a 20 rig drilling program, so production growth should accelerate through the year.

Best news is that cash flow from operations combined with the cash distributions from EnLink will more than cover this years $2.5 Billion capex program. Drilling in the STACK and Permian Basin should generate BIG proven reserve additions this year.

Devon is a very big company. Production should be approaching 600,000 BOE per day by year-end.

[dan_s]

Bob Howard, an EPG member and Managing Partner of Resource Royalty, just sent me note that Devon will soon be bringing on 18 horizontal STACK wells in leasehold where Resource Royalty has the royalty interest. If you are seeking high yield cash flow, call Bob to get on the distribution list for their next royalty pool. "Royalty Pools" are partnerships that hold a basket of mineral interests and ORRI's. Bob will be attending our 2/23 luncheon in Dallas.

Four of our Sweet 16 (CLR, DVN, NFX and XEC) are now drilling on leases where Resource Royalty has an interest.

Robert E Howard
Managing Partner
Resource Royalty, LLC
8214 Westchester Dr. suite 735
Dallas, TX 75225
214 691 5234
bhoward@resourceroyaltyllc.com

[mkarpoff]

Well, I guess the mkt doesn't like the report so much.

[dan_s]

Trying to explain the day-to-day moves of the market, especially a single stock, will drive you nuts. I gave up a long time ago. Devon is in MUCH BETTER shape today than it was a year ago.

I think the market underestimates the value of their stake in EnLink. I sure did up until today.