Devon Energy
1Q16 Earnings Report
Price at time of Publishing: $33
1Q16 Results: Beat Consensus Bottom Line
Devon reported a 1Q16 loss of $0.53 per share, beating guidance of a loss of $0.64. Revenues came in at $2.2 billion. While the revenue line was short of estimates, it hardly matters considering the increase in Crude since March and the company’s major restructuring announced. (See below).
For most of the quarter Wall Street analysts focused on the negative effects of $30 Crude. Devon has been rolling back production and recently made a serious 75% dividend cut. The company is restructuring both its business and the balance sheet to prepare for the next domestic energy cycle. Based on current low rig count, the US Exploration and Production cycle is near rock bottom and can only go one way, and that is up.
Devon’s actions are just the right medicine. The stock has been an absolute winner. From a February 19th low of $18, the stock has nearly doubled. Compared with virtually any measure including other Exploration and Production companies like Apache (APA) and Pioneer Natural Resources (PXD), Devon is showing the best stock performance.
But the restructuring doesn’t stop here. Further aggressive action is making Devon lean and mean. Devon has an agreement to sell its non-core Mississippian assets in northern Oklahoma to White Star Petroleum for $200 million. Altogether, $2-$3 billion of non-core assets will be sold this year. Proceeds will reduce Devon’s $12 billion in long term debt. These moves, added to the $1.3 billion in equity capital raised in February, make Devon as lean as it has been in years. We like Devon here but we’re watching crude like a hawk. At $43.50 it’s had a good run from $26 in February. If it stays in this area for a month we’d be happy campers. But if it heads to $35 and lower, we will be removing Devon from the Special Opportunities Portfolio. We hereby raise the target from $28 to $43 and the sell price from $15 to $28.