Devon Energy Corporation (DVN)

DVN 
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Devon Energy Corporation (DVN)

Q1 2013 Earnings Call

May 1, 2013 11:00 AM ET

Executives

Vince White – SVP, Communications

John Richels – President and CEO

David Hager – EVP, Exploration and Production

Jeff Agosta – CFO

Analysts

Doug Leggate – Bank of America Merrill Lynch

Charles Mead – Johnson Rice

Bob Brackett – Bernstein Research

Dave Kistler – Simmons & Company

Brian Singer – Goldman Sachs

David Tameron – Wells Fargo

Presentation

Operator

Welcome to Devon Energy’s first quarter earnings conference call. At this time, all participants are in a listen-only mode. After the prepared remarks, we will conduct a question-and-answer session. This call is being recorded.

At this time, I’d like to turn the conference over to Mr. Vince White, Senior Vice President of Communications and Investor Relations. Sir, you may begin.

Vince White

Thank you, and welcome everybody to Devon’s first quarter earnings call and webcast. Today’s call will follow our usual format. I’ll cover a couple of preliminary items, and then our President and CEO, John Richels, will provide his comments. Following that, Dave Hager, the Head of Exploration will provide an operations update, and then Jeff Agosta, our CFO, will finish with a review of our financial results, as well as some specific guidance for the upcoming quarter.

After Jeff’s discussion, we will have our Q&A session, and we’ve got Darryl Smette, the head of marketing midstream and supply chain with us today to help in the Q&A. We’ll conclude the call after about an hour, but as usual, the Investor Relations team will be available for any follow-up for the rest of the day.

During the call today, we’ll make some minor changes to our forward-looking estimates based on the actual results for the first quarter and our outlook for the remainder of the year. However, we will not be issuing a revised 8K because our outlook for the remainder of the year does fall within the ranges that we provided in the former 8K filed in February.

To access a comprehensive summary of our current guidance, you can go to Devonenergy.com and click on the guidance link found within the Investor Relations section of our website.

Please note that all references today to plans, forecasts, expectations, and estimates are considered forward-looking statements under US securities law and are subject to a number of assumptions, risks, and uncertainties, many of which are beyond our control. These statements are not guarantees of future performance, and to see a discussion of the risk factors relating to these estimates, you can reference our various filings with the Securities and Exchange Commission.

Also in today’s call, we’ll reference certain non-GAAP performance measures. When we use these measures, we’re required to provide the related disclosures and they can be found on Devon’s website as well.

Before I turn the call over to John, I want to briefly comment on the 1.9 billion non-cash asset impairment charge taken during the first quarter, which resulted from a full-cost accounting ceiling test. The fact that we have an impairment charge in this quarter, in spite of stronger gas prices, seems counterintuitive at first glance. However, when you examine the mechanics of the ceiling test, it begins to make sense.

In the second quarter of last year, several of our gassy large cap piers that are on the full cost method of accounting took significant impairment charges because of declining gas prices. However, Devon’s relatively large oil and NGLs component and our reserve base protected us from having a write-down in last year’s second quarter, and reduced the magnitude of our write-downs in the second half of last year.

In the first quarter of this year, weakness in US NGLs prices and Canadian oil price realizations removed some of the cushion that was previously provided. When taken in aggregate, including our first quarter charge announced today, all of the large cap companies utilizing the full-cost method have taken write-downs of similar relative magnitude. The impairment charge, just as a reminder, the impairment charge has no impact on cash flow, cash balances or our credit agreements, and is certainly not indicative of the future cash flows we expect to generate from our assets.

When you exclude the asset impairment charge and other items analysts typically exclude from estimates, our non-GAAP earnings and cash flow for the quarter were $0.66 and $2.85 per share on a diluted basis, respectively. Higher than forecasted production and lower pre-tax costs were the key drivers that allowed us to comfortably exceed Wall Street’s expectations for the quarter.

With those items out of the way, I’ll turn the call over to John Richels.

John Richels

Thank you, Vince, and good morning, everyone. In the first quarter, we delivered very solid operating results across all of our core development assets. The conversion of our portfolio mix to a higher oil weighting remains on track and that’s evidenced by the strong growth in oil production during the quarter. More importantly, the projects driving this growth are delivering very attractive rates of return. So now, let me just go over a few highlights.

During the first quarter, we increased company-wide oil production 8%, compared to the last quarter, and 14% higher than the first quarter of 2012. This growth was led by our US oil production, which increased 23% year-over-year, driven largely by continued success in the Permian Basin. With the aggressive transition of our North American onshore portfolio mix, oil and liquids production has now reached 41% of total volumes, which is up from 30% just a few years ago.

Read the rest of this transcript for free on seekingalpha.com