Following Devon Energy Corporation’s (DVN) robust third quarter 2010 earnings results on November 3, 2010, analyst sentiments on the stock were mixed, while estimates are drifting more to the upside. Strong realized prices for hydrocarbons and improved cost efficiencies resulting from the asset repositioning Devon to outperformance during the September quarter.
Earnings Review
Devon Energy Corp. for the third quarter of 2010 clocked adjusted EPS of $1.44, which was above the Zacks Consensus Estimate of $1.29 and year-ago quarterly EPS of $1.10. On a reported basis, the company reported an EPS of $4.79 versus $1.12 in the year-ago quarter. Reported quarter numbers include a one-time gain of $1.5 billion from its sale of assets in Azerbaijan.
Quarterly revenues of $2.4 billion barely exceeded the Zacks Consensus Estimate of $2.3 billion, while it rose 27.3% from prior year revenues. The strong year-over-year performance in the quarter was aided by higher realized natural gas and liquids prices.
Revenue from oil, natural gas and NGL in the quarter totaled $1.9 billion, up 25.8%. Devon’s average third-quarter realized price per Boe, including the impact of hedges, increased 23% over the year-ago period to $33.96 per barrel. Marketing and midstream revenues increased 34% to $461 million due to higher throughput and higher natural gas and natural gas liquids prices.
We have discussed the quarterly results at length here: Devon Energy Surpasses Estimates
Agreement of Analysts
The overall trend in annual estimates remains mixed, with 4 (out of 11) downward moves for fiscal 2010 in the last 7 days and no upside in estimates. In the last 30 days too, 2 analysts raised estimates while 5 analysts made negative revisions.
Estimate revision trends for 2011, though mixed, leans more on the positive side with 7 (out of 21) analysts moving up their estimates in the last 7 days, while only one of them lowered estimates. Over the 30-day period also there were 12 upward revisions versus only 3 downward revisions.
Magnitude of Estimate Revisions
Though a handful of analysts lowered estimates for 2010 in the last 7 and 30 days, estimates rose 4 cents and 3 cents, respectively, in both the periods. Based on the number of estimate revisions over the last 7 days, estimates for 2011 were up by 12 cents while estimate revisions over the one-month period pointed to a 19-cent increase in estimates.
Maintain Neutral
We like Devon for its deep and diversified portfolio, primarily comprising unconventional resources, which reflect significant growth potential for the long term. Additionally, the company’s Marketing and Midstream operations, primarily located in the vicinity of its core onshore operations in the U.S. and western Canada, complement its E&P business.
The Marketing and Midstream unit gathers, processes and markets oil, gas and NGL production, contributing effectively to the Devon’s strategies of growing reserves and production, managing expenditures and improving margin by maximizing realized prices.
Based in Oklahoma City, Oklahoma, Devon is a major independent oil and gas exploration and production (E&P) company in the U.S. and has leverage to some of the best North American natural gas assets.
Devon’s third quarter results confirmed continued successful execution of the company’s focused North American onshore strategy as evidenced by quarterly production records at the company’s liquids-rich Barnett and Cana shale plays and a multi-year production boom at its Permian Basin properties.
During the third quarter, Devon continued to make significant strides to complete its strategic repositioning, which was announced a year ago. The company successfully sold its interest in the ACG field in Azerbaijan and its assets in China, receiving aggregate pretax divestiture proceeds of roughly $6.8 billion.
Devon also progresses with the third development project on its Jackfish oil sands leases in Alberta, Canada. Devon expects to begin facilities construction at Jackfish 3 by year-end 2011, with plant startup targeted for 2015.
Devon is currently continuing full-scale operations at its original Jackfish project, which began operating in 2007. Construction of the company’s Jackfish 2 project is now roughly 85% complete. Jackfish 2 remains on schedule for startup in late 2011.
Over the years, Devon has shown financial discipline by prudently managing its balance sheet and operating predominantly within generated cash flows. Helped by the divestment proceeds, Devon exited the September quarter with an enviable $4 billion of cash on hand and a bulletproof balance sheet.
In the quarter, the company also significantly lowered its total debt to roughly $5.6 billion and net debt to $1.6 billion demonstrating a great deal of financial strength. At quarter-end, the company had $2.6 billion available under its credit lines and net debt-to-adjusted capitalization ratio of 8%.
Going forward, the company expects to grow production 10% from the fourth quarter of 2009 to 625-635 MBoe/d in fourth quarter of 2010. For 2011, Devon expects overall production growth of 68% led by a roughly 20% growth in oil and NGL volumes.
However, we expect the present constrained commodity environment to continue weighing on Devon’s financial performance, at least in the near term. We maintain our Neutral recommendation for Devon shares, supported by the company’s Zacks #3 Rank (Hold).
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