Devon Energy Corporation (DVN)

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Devon Energy (DVN)

Q2 2013 Earnings Call

August 7, 2013 10:00 a.m. ET

Executives

Vince White – SVP, Communications

John Richels – President and CEO

David Hager – EVP, Exploration and Production

Jeff Agosta – CFO

Analysts

Arun Jayaram - Credit Suisse

Doug Leggate - Bank of America Merrill Lynch

Brian Singer - Goldman Sachs

[Sue Lin] - Robert W. Baird

John Herrlin - Société Générale Americas Securities

Rehan Rashid - FBR

Charles Meade - Johnson Rice

Presentation

Operator

Welcome to Devon Energy’s second quarter earnings conference call. [Operator instructions.] At this time, I would 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 everyone to Devon’s second 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 comment on the quarter. Following that, Dave Hager, our chief operating officer, will provide the operations update, and then we’ll have a financial review by our CFO, Jeff Agosta. We’ll follow that up with a Q&A session.

And I’ll point out that our executive chairman, Larry Nichols, as well as Darryl Smette, who is the head of marketing midstream and supply chain, are both with us today to join in the Q&A. We’ll conclude the call after one hour.

During the call today, we’re going to update some of our forward-looking estimates based on the actual results that we’ve seen in the first half of the year our revised outlook for the second half of 2013, but we are not planning to issue a new 8K. We will, however, post any updated estimates that we provide during the call today on the guidance page of our website.

If you go to our website, you can just click on the guidance link, look in the investor relations section, and all of our guidance is summarized there.

All references today to our plans, forecasts, expectations, and estimates are forward-looking statements under US securities law and they are of course subject to a number of assumptions, risks, and uncertainties. Many of these are beyond our control. And I’d point out that these statements aren’t guarantees of future performance. You can see a discussion of the risk factors relating to these estimates in our form 10-K.

Also on today’s call, we will reference certain non-GAAP performance measures and when we do that, we’re required to provide certain related disclosures. Those can be found on Devon’s website.

Before I turn the call over to John, I’ll point out that both earnings and cash flow for the second quarter significantly beat Street estimates. Our non-GAAP earnings climbed to $1.21 per diluted share. That’s more than double the earnings we reported in the year ago period, and it exceeded the Wall Street consensus by about 30%.

Cash flow climbed to $1.4 billion for the quarter, the highest level in the last six quarters, and that also comfortably beat Street expectations. Overall, from both an earnings and cash flow perspective, it was an excellent quarter for Devon.

At this point, I’ll turn the call over to President and CEO John Richels.

John Richels

Thank you, Vince, and good morning everyone. As Vince just mentioned, we had an outstanding second quarter. In addition to benefitting from the substantial improvement in realized prices during the quarter, we exceeded the top end of our production guidance.

At the same time, our year to date cost metrics are tending towards the low end of the forecast range. This is all strong evidence of the successful execution of our business plan as we continue to grow our high margin oil production.

Let me begin today by reviewing some of the highlights of the quarter. In the second quarter, we increased company-wide oil production 14% compared to the second quarter of 2012, and 4% compared to last quarter. This growth was driven entirely by high-margin light oil production from our U.S. assets, which increased a robust 36% year over year.

With the success we’ve had in growing our oil production, we now expect liquids production to exceed 45% of total volumes by year end, and that’s up from just 30% just a few years ago.

In the second quarter, total company-wide production from our North American asset base is at an all-time record, averaging 698,000 equivalent barrels per day. This exceeded the midpoint of our guidance by 3% and topped the upper end of our forecast range by 8,000 barrels per day.

Based on the results of the first half of the year, we now expect our full year 2013 production to be near the top end of our guidance range for the year. Jeff will cover the production guidance in a little more detail later in the call.

When you examine our operating results in greater detail, you’ll find that we had terrific execution across all of our core focus areas. The most notable growth in the second quarter came from our massive 1.3 million net acre position in the Permian Basin, where oil production increased 32% year over year. In fact, this momentum is continuing into the second half of the year, as our oil production in the Permian will surpass the 50,000 barrels per day milestone.

We’ve also had success expanding our drilling inventory in the Permian. You might recall, in the first quarter, we doubled our Bone Springs inventory from 350 to 700 locations. Today we’re once again doubling our Bone Springs inventory from 700 to 1,400 locations. This represents more than 1,000 future locations that we’ve added of the past year alone, loosening our oil development inventory in the Permian to nearly 4,000 risked locations.

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