Devon Energy (DVN) Q1 Results - Feb 16
Posted: Wed Feb 16, 2022 12:35 pm
Devon has been moved to our High Yield Income Portfolio, but I will be updating my forecast/valuation model this afternoon and making comments here.
Here is BofA Equity Research comments. Note that BofA is still using $65/bbl oil to value upstream companies.
-----------------------------------------
2/16/2022
Clean beat, solid underlying quarter
DVN's adj. EPS of $1.39 beat both consensus & BofA estimates of $1.24 and $1.28
respectively on a mix of items including strong production and lower opex / production
taxes vs estimates. Total production of 611 Mboe/d topped management guidance of
583-601 Mboe/d. One of the most anticipated questions of whether capital discipline
and a commitment to cash returns will hold is answered with 2022 E&P capex of $1.9bn
- $2.2bn & production of 570 - 600 Mboe/d (~50% oil) unchanged from prior guidance.
Total capex of ~$2.06bn - $2.44bn looks in-line with street estimates ($2.2bn) and on
our estimates suggests FcF of over $5bn and a prospective FcF yield of 15% in 2022
(BofA $85 Brent). While DVN's cash power is impressive, it supports our estimate of fair
value which is unchanged at $60 which we call Neutral vs peers.
Free cash flow defines value; variable dividends don’t
DVN has significant capacity for cash returns: with 4Q21 earnings its quarterly fixed
dividend increases by ~45% to $0.16 for an implied~1.2% yield; but Devon still plans to
return up to 50% of 'excess' cash after the base dividends to shareholders via variable
dividends: for 4Q21 that amounts to a total fixed plus variable div of ~$1/sh; with that
said we continue to believe market recognition of variable distributions is transitory in a
depleting business; in this respect management has raised its buyback program by 60%
to $1.6bn after completing ~14mm shares of $589mm in 4Q21 at an average price of
~$42 /sh, demonstrating perhaps the permanence of opportunistic buy backs. At the
scale of free cash flow we see at strip prices, we suggest management can reasonably
sustain material buy backs as a permanent part of its cash return strategy.
Reiterate Neutral given only 17% upside to $60 PO
With that said, DVN's free cash visibility is what we believe defines value; how that cash
is distributed does not change value and in fact, may erode the point forward equity
value for a depleting business, in our view. DVN's pacesetting model for cash returns has
arguably been recognized by its place as the best performing stock in the S&P500 in the
past year – but it is a testament to designing a transparent cash return model with a
commitment to capital discipline, with the disclosure on inventory depth, sustaining
capital and a break even oil price to anchor confidence in value. The problem is it also
defines value that has limited upside at strip / $65 Brent deck that is our base case.
-----------------
I'm sure that the term "depleting business" is just BofA trying to stay "WOKE".
Here is BofA Equity Research comments. Note that BofA is still using $65/bbl oil to value upstream companies.
-----------------------------------------
2/16/2022
Clean beat, solid underlying quarter
DVN's adj. EPS of $1.39 beat both consensus & BofA estimates of $1.24 and $1.28
respectively on a mix of items including strong production and lower opex / production
taxes vs estimates. Total production of 611 Mboe/d topped management guidance of
583-601 Mboe/d. One of the most anticipated questions of whether capital discipline
and a commitment to cash returns will hold is answered with 2022 E&P capex of $1.9bn
- $2.2bn & production of 570 - 600 Mboe/d (~50% oil) unchanged from prior guidance.
Total capex of ~$2.06bn - $2.44bn looks in-line with street estimates ($2.2bn) and on
our estimates suggests FcF of over $5bn and a prospective FcF yield of 15% in 2022
(BofA $85 Brent). While DVN's cash power is impressive, it supports our estimate of fair
value which is unchanged at $60 which we call Neutral vs peers.
Free cash flow defines value; variable dividends don’t
DVN has significant capacity for cash returns: with 4Q21 earnings its quarterly fixed
dividend increases by ~45% to $0.16 for an implied~1.2% yield; but Devon still plans to
return up to 50% of 'excess' cash after the base dividends to shareholders via variable
dividends: for 4Q21 that amounts to a total fixed plus variable div of ~$1/sh; with that
said we continue to believe market recognition of variable distributions is transitory in a
depleting business; in this respect management has raised its buyback program by 60%
to $1.6bn after completing ~14mm shares of $589mm in 4Q21 at an average price of
~$42 /sh, demonstrating perhaps the permanence of opportunistic buy backs. At the
scale of free cash flow we see at strip prices, we suggest management can reasonably
sustain material buy backs as a permanent part of its cash return strategy.
Reiterate Neutral given only 17% upside to $60 PO
With that said, DVN's free cash visibility is what we believe defines value; how that cash
is distributed does not change value and in fact, may erode the point forward equity
value for a depleting business, in our view. DVN's pacesetting model for cash returns has
arguably been recognized by its place as the best performing stock in the S&P500 in the
past year – but it is a testament to designing a transparent cash return model with a
commitment to capital discipline, with the disclosure on inventory depth, sustaining
capital and a break even oil price to anchor confidence in value. The problem is it also
defines value that has limited upside at strip / $65 Brent deck that is our base case.
-----------------
I'm sure that the term "depleting business" is just BofA trying to stay "WOKE".