Devon Energy Misses on Both Counts - Analyst Blog


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Devon Energy Corporation ( DVN ) reported first quarter 2012 pro forma earnings per share of $1.05 compared with $1.34 in the year-ago quarter. The decline in earnings was due to higher Canadian oil price differentials, and increase in oilfield service and supply expenses. The reported earnings missed the Zacks Consensus Estimate of $1.44.

On a GAAP basis, the company reported earnings per share of 97 cents, flat year over year. The variance between pro forma and GAAP earnings in the reported quarter resulted from a 5-cent loss from adjustments on asset sales related to discontinued operations, 2 cents loss from oil and gas derivatives, and 1 cent loss from interest rate and financial instruments.


Devon's quarterly revenue was $2.50 billion versus $2.18 billion in first quarter 2011. The quarterly performance was driven by increased Oil , Gas and Natural Gas Liquids ("NGL") sales, and higher oil, gas and NGL derivatives, partially offset by a decline in marketing and midstream revenues. The reported revenue missed the Zacks Consensus Estimate of $2.54 billion.

Operating Results

In the first quarter 2012, North American onshore production increased 10% year over year to 694,000 oil-equivalent barrels ("Boe") per day. The growth was attributable to higher oil production, which increased by 26% year over year to 256,000 Boe per day.

Lease operating expenses of the company in first quarter 2012 increased to $514 million from $424 million in the year-ago quarter. The increase in expenses was due to higher industry costs related to increase in operations in the oil-focused basins.

Interest expenses were $87 million as of March 31, 2012, up from $81 million in the year-ago period due to an increase in debt level.

Realized Prices

In the reported quarter, Devon's overall realized price was $32.83 per Boe, compared with $34.38 per Boe in the year-ago period. This decline in price was due to depressed gas and NGL realized prices, but partially offset by strong realized oil prices.

The gas price realization was down by 24.7% year over year to $3.02 per thousand cubic feet ("Mcf") from $4.01 per Mcf in the year-ago quarter. Realized prices for NGL were also down 5.2% to $35.49 per barrel from $37.45 per barrel in the year-ago quarter.

Realized oil prices in the quarter improved significantly to $76.14 per barrel, representing an 8.0% jump from the year-ago quarter.

Financial Health

Cash and cash equivalents of the company as of March 31, 2012 were $5.83 billion versus $5.56 billion as of December 31, 2011.

Capital expenditure in first quarter 2012 was $2.09 billion, up from $1.83 billion reported in the year-ago period.

Long-term debt was $6.72 billion as of March 31, 2012 compared with $5.97 billion as of December 31, 2011.

Peer Update

Devon Energy's peer Chesapeake Energy Corporation ( CHK ) also announced its first quarter 2012 earnings: 18 cents per share compared with 75 cents in the year-ago quarter. The quarterly earnings missed the Zacks Consensus Estimate of 29 cents.

Chesapeake Energy's first quarter 2012 revenue was $2.42 billion versus $1.61 billion in the prior-year quarter. The reported revenue failed to surpass the Zacks Consensus Estimate of $2.75 billion.

Our View

Devon Energy's results in the first quarter failed to meet our expectations due to weak gas and NGL prices.

However, Devon Energy's continuous acreage acquisitions program, allied oil and gas drilling and development activities, and higher midstream capital activities related to addition of natural gas processing plants and pipeline extension will fuel near-term growth. The company's diversified portfolio, with significant oil and natural gas liquids-rich projects, is also likely to generate better risk-adjusted profit.

But, at the same time, we are concerned about a rise in oil-field operations and servicing expenses.     

Devon Energy currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

Based in Oklahoma City, Oklahoma, Devon Energy Corporation, is an independent energy company engaged primarily in exploration, development and production of oil and natural gas.

CHESAPEAKE ENGY (CHK): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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