Devon Energy Corp. (DVN) reported fourth-quarter 2010 adjusted EPS of $1.57, which was above the Zacks Consensus Estimate of $1.39. On a GAAP basis, the company reported an EPS of $1.29 versus $1.49 in the year-ago quarter, including one-time items relating to the sale of assets.
For full year 2010, Devon Energy posted earnings of $6.39 per share, beating the Zacks Consensus Estimate of $6.00 by 39 cents. GAAP earnings for the full year were $10.31 per share compared with a net loss of $5.58 per share in 2009.
Operating Results
Devon’s quarterly revenues of $2.1 billion fell short of the Zacks Consensus Estimate and the year-ago revenue of $2.4 billion. However, revenue for full-year 2010 came in at $9.9 billion, exceeding the Zacks Consensus Estimate of $9.4 billion and the year-ago revenue of $8.0 billion.
The outstanding full-year performance was driven by increased oil and natural gas production and sales volumes along with favorable prices realized. The downside in fourth quarter revenue is attributed to a number of minor operational issues which lowered production in the quarter.
The favorable 2010 results reflect outstanding performance of the company’s North American drilling program for the year. During the year, Devon increased its net hydrocarbon production by 2.4% to 227.6 million oil-equivalent barrels (MMBoe), growing production from its North American onshore properties by 1.4% to 223 MMBoe.
Production growth in 2010 was led by liquids production growth across regions as well as the development of the Cana-Woodford Shale play in western Oklahoma. During 2010, Devon drilled nearly 1,588 wells with a 99% success rate.
Revenue from oil, gas and natural gas liquids in 2010 increased 19% to $7.3 billion compared with $6.1 billion in 2009. Devon’s average full-year 2010 realized price per Boe, including the impact of hedges, increased 26% over the prior year to $35.81 per barrel. The increase in commodity prices during the year more than offset the effects of lost production from the sale of the Gulf of Mexico properties in 2010.
At year-end 2010, Devon grew its proved reserves to an all-time record of 2.9 billion equivalent barrels (BBoe) helped by its North American onshore focused capital program. The company’s proved reserves depicted a 9% increase from the 2009 levels, excluding the divested reserves from the comparable period. During 2010 Devon added 389 MMBoe through successful drilling.
Devon’s total proved reserves for 2010 included 2.04 BBoe of proved developed reserves, making up 71% of total reserves. The company’s year-end proved reserves were composed of 681 million barrels of crude oil, 10.3 trillion cubic feet of natural gas and 479 million barrels of natural gas liquids.
On the cost side, the cost efficiencies realized from Devon’s cost strategic repositioning paid off very well, with no or only modest increases in costs during 2010. Lease operating expenses (LOE) in 2010 increased 1% over 2009 to $1.7 billion due to the strengthening of the Canadian dollar. Devon’s divestiture of higher cost Gulf of Mexico properties helped offset the effects of rising oilfield service and supply costs.
Devon’s depreciation, depletion, and amortization expense (DD&A) of oil and gas properties declined 9% year over year to $1.7 billion, again due to the disposal of the Gulf of Mexico properties. General and administrative expenses declined 13% in 2010 to $563 million driven by lower employee costs related to the company’s strategic repositioning. Interest expense in 2010 increased $14 million to $363 million.
Financial Health
Devon maintains a healthy financial and liquidity position. Devon’s operating cash flow balance sheet changes in 2010 increased 21% year over year to $5.7 billion. The company added nearly $7 billion to its cash flows in 2010 from sale proceeds under its strategic repositioning efforts.
In total, these cash sources allowed Devon to fund its total capital demands, to repurchase 18.3 million shares of common stock for $1.2 billion, and to retire $1.8 billion of debt during the year.
As of December 31, 2010, the company’s cash balances totaled $3.4 billion, with net debt adjusted capitalization of 10% (compared with 29% at year-end 2009).
Our View
Devon Energy had an outstanding 2010 driven by solid operating results and the successful execution of its strategic repositioning. During the year, the company sold the majority of its offshore and international assets, nearing the completion of its strategic repositioning with over $10 billion of asset sales.
Going forward, we expect the North American Onshore focused company to benefit from its vast slate of onshore projects.
We maintain our Neutral recommendation on Devon shares. The company also retains a short term Zacks #3 Rank (Hold), at par with its closest peer ConocoPhillips (COP).
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