Devon Energy – Q3 Results as per Expectation
Posted: Wed Nov 06, 2024 3:09 am
Devon Energy reported Q3 results as per expectation. Production was above the outlook, but only due to higher NGL and natural gas production. Oil was flat. Profitability and shareholder returns were as expected. The balance sheet deteriorated due to the $ 3.25 B cash payment for the Grayson Mill acquisition and will reduce shareholder returns in the short term.
Production
• Q3 production (728 K BoE/d) was above the outlook of 670-690 K BoE/d, and 3% above Q2 (707 K BoE/d). I had expected a Q3 production of 692 K BoE/d.
• Q3 included 3 days of Grayson Mill production, which closed on the 27th September and added 5 K BoE/d.
• Q3 oil production (335 K bbl/d) stayed flat versus Q2. The Q3 production increase was purely in NGL and natural gas production and not in oil.
• Q3 confirms a trend where the oil cut is falling: From 49.0% in Q1 2023 to 46% in Q3 2024. Proven reserves are 43% oil, so the declining oil trend can continue.
• Grayson Mill has a 52% oil cut and will boost the oil cut in 2025 to 47.5%.
• Devon outlook for Q4 is 811-830 K BoE/d, which is well above the 765 K BoE/d level which Devon had indicated in July after the closure of the Grayson Mill acquisition. Grayson Mill is adding 110 K BoE/d.
• For Q4, I increased my production estimate to 825 K BoE/d.
• The Devon 2025 outlook is 800 K BoE/d. My estimate is similar.
• After 2025 production may start to decline, as Devon lacks the proven reserves to sustain the 2025 production levels.
Balance sheet
• Due to the Grayson Mill payments, Q3 long-term debt ($ 8.9 B) was $ 3.2 B above Q2 ($ 5.7 B).
• With only one quarter of Grayson Mill included, Devon is heading for a slightly high 2024 debt/EBITDA ratio of 1.1.
• Debt/EBITDA ratio can recover to a good 0.82 in 2025.
• Due to the Grayson Mill acquisition, the equity ratio (=equity/balance sheet total) dropped from 50.6% (Q2) to 47.6% (Q3).
• Late 2024 the equity ratio can improve to 49.7%.
• The balance sheet needs some restoration, but allows moderate shareholder returns in Q4 and H1 2025. In H2 2025 shareholder returns can be fully restored.
Profitability
• Q3 adjusted eps (excluding non-cash hedging gains of $ 166 M). was $ 1.15, well below Q2 ($ 1.41). The drop is mostly due to lower oil and gas prices. Production expenses were as expected.
• For Q4 (WTI=$ 71.77/bbl), I expect an eps (excluding non-cash hedging results) of $ 1.124, leading to an 2024 eps of $ 4.89 (PE=8.0).
• In 2025-2028 the eps can increase to $ 5.20-5.40 (PE=7.3-7.5).
Shareholder returns
• Devon in 2024 paid in Q1-Q3 a fixed quarterly dividend of $ 0.22. I expect the fixed dividend to continue in Q4 and 2025.
• In Q1 and Q2 Devon paid a special dividend: $ 0.13 (Q1) and $ 0.23 (Q2).
• There was no special dividend in Q3, and I do not expect one in Q4 or H1 2025 either as the balance sheet needs restoration.
• Devon bought back shares in 2024, for $ 205 M (Q1), $ 256 M (Q2) and $ 295 M (Q3).
• I expect share buybacks to stop in Q4 and H1 2025.
• 2024 total shareholder returns thus are heading for 6.6%.
• Special dividend and the share buybacks can restart in H2 2025.
• 2025 yield can drop to 5.0%, but then can recover to 8-9% in 2026-2028 with a restart of special dividends and share buybacks.
Devon Energy reported Q3 results as per expectation. Production was above the outlook, but only due to higher NGL and natural gas production. Profitability and shareholder returns were as expected. The balance sheet deteriorated due to the $ 3.25 B cash payment for the Grayson Mill acquisition and will reduce shareholder returns in the short term.
The Devon Energy share price has declined -15.1% in 2024. Consequently, Devon climbed up in my oil and gas ranking system and now ranks in 31tst position, just outside the top 25 of the 82 oil and gas companies ranking.
Production
• Q3 production (728 K BoE/d) was above the outlook of 670-690 K BoE/d, and 3% above Q2 (707 K BoE/d). I had expected a Q3 production of 692 K BoE/d.
• Q3 included 3 days of Grayson Mill production, which closed on the 27th September and added 5 K BoE/d.
• Q3 oil production (335 K bbl/d) stayed flat versus Q2. The Q3 production increase was purely in NGL and natural gas production and not in oil.
• Q3 confirms a trend where the oil cut is falling: From 49.0% in Q1 2023 to 46% in Q3 2024. Proven reserves are 43% oil, so the declining oil trend can continue.
• Grayson Mill has a 52% oil cut and will boost the oil cut in 2025 to 47.5%.
• Devon outlook for Q4 is 811-830 K BoE/d, which is well above the 765 K BoE/d level which Devon had indicated in July after the closure of the Grayson Mill acquisition. Grayson Mill is adding 110 K BoE/d.
• For Q4, I increased my production estimate to 825 K BoE/d.
• The Devon 2025 outlook is 800 K BoE/d. My estimate is similar.
• After 2025 production may start to decline, as Devon lacks the proven reserves to sustain the 2025 production levels.
Balance sheet
• Due to the Grayson Mill payments, Q3 long-term debt ($ 8.9 B) was $ 3.2 B above Q2 ($ 5.7 B).
• With only one quarter of Grayson Mill included, Devon is heading for a slightly high 2024 debt/EBITDA ratio of 1.1.
• Debt/EBITDA ratio can recover to a good 0.82 in 2025.
• Due to the Grayson Mill acquisition, the equity ratio (=equity/balance sheet total) dropped from 50.6% (Q2) to 47.6% (Q3).
• Late 2024 the equity ratio can improve to 49.7%.
• The balance sheet needs some restoration, but allows moderate shareholder returns in Q4 and H1 2025. In H2 2025 shareholder returns can be fully restored.
Profitability
• Q3 adjusted eps (excluding non-cash hedging gains of $ 166 M). was $ 1.15, well below Q2 ($ 1.41). The drop is mostly due to lower oil and gas prices. Production expenses were as expected.
• For Q4 (WTI=$ 71.77/bbl), I expect an eps (excluding non-cash hedging results) of $ 1.124, leading to an 2024 eps of $ 4.89 (PE=8.0).
• In 2025-2028 the eps can increase to $ 5.20-5.40 (PE=7.3-7.5).
Shareholder returns
• Devon in 2024 paid in Q1-Q3 a fixed quarterly dividend of $ 0.22. I expect the fixed dividend to continue in Q4 and 2025.
• In Q1 and Q2 Devon paid a special dividend: $ 0.13 (Q1) and $ 0.23 (Q2).
• There was no special dividend in Q3, and I do not expect one in Q4 or H1 2025 either as the balance sheet needs restoration.
• Devon bought back shares in 2024, for $ 205 M (Q1), $ 256 M (Q2) and $ 295 M (Q3).
• I expect share buybacks to stop in Q4 and H1 2025.
• 2024 total shareholder returns thus are heading for 6.6%.
• Special dividend and the share buybacks can restart in H2 2025.
• 2025 yield can drop to 5.0%, but then can recover to 8-9% in 2026-2028 with a restart of special dividends and share buybacks.
Devon Energy reported Q3 results as per expectation. Production was above the outlook, but only due to higher NGL and natural gas production. Profitability and shareholder returns were as expected. The balance sheet deteriorated due to the $ 3.25 B cash payment for the Grayson Mill acquisition and will reduce shareholder returns in the short term.
The Devon Energy share price has declined -15.1% in 2024. Consequently, Devon climbed up in my oil and gas ranking system and now ranks in 31tst position, just outside the top 25 of the 82 oil and gas companies ranking.