Devon Energy Corp. posted better production, EBITDA and spent less money than consensus predictions but still saw its stock price crumble by roughly 13% on tepid production guidance for the fourth quarter and reduced dividend.
The company also noted some integration hiccups with its acquisition of RimRock Oil & Gas in the Williston Basin and additional insights into its newly closed Validus Energy acquisition in the Eagle Ford. Still, Devon touted results in the Permian Basin, where it continues to improve drilling productivity and a Wolfcamp B test well in New Mexico.
During Devon’s Nov. 2 earnings call, Tudor, Pickering, Holt & Co. (TPH) analyst Matthew Portillo noted that the markets seemed “spooked” by tepid fourth-quarter production guidance of 650,000 boe/d, 2% below consensus.
Capex guidance related to the Validus and RimRock acquisitions also increased by $120 million, putting fourth-quarter capex at $880 million. Cowen analyst David Deckelbaum said the new guidance is 16% higher than the equity research firm had modeled.
Devon 3Q Financial Indicators
|Metric||3Q 2022||Versus 3Q 2021|
|Core earnings (per share)||$2.18||102%|
|Operat ing cash flow ($MM)||$2,104||32%|
|Free cash flow ($MM)||$1,476||31%|
Portillo said the selloff of Devon stock seemed “overdone” and the result of investors who are “skittish around capital efficiency degradation in the Permian given some issues seen by peers YTD.”
“While we figured Devon would take a bit of a hit at the open yesterday on Q4 guidance that underwhelmed expectations with oil at 319,000-326,000 bbl/d of oil vs. consensus of about 331,000 bbl/d of oil, we did not expect the stock to underperform peers by more than 10%,” Portillo said.
But he noted that Devon’s well data doesn’t appear to bear that out, with productivity per foot consistent across the company’s development program since 2021.
He added that Devon is running rigs in the Permian that will jumpstart its drilling program in 2023, but may also be inflating fourth-quarter capex. That left him “comfortable” that capex in 2023 of $3.6 billion to hit TPH’s production forecast.
“All in, the sell-off yesterday feels a bit overdone as the production impact to Q4 is transitory in our view and our estimates for 2023, should they hold, generally seem to be in line with investor expectations,” he said.
Near the end of day trading on Nov. 3, Devon shares had clawed back about 5% of its previous day’s losses.
Deckelbaum said in a Nov. 1 report that Devon’s third-quarter production was 3% above its model as it added an additional turned-in-line well.
Devon COO Clay Gaspar noted that in the Permian Basin, where 60% of the company’s activity is focused, Devon improved its Wolfcamp drilling productivity by 13% on a per foot basis quarter-over-quarter.
Gaspar also noted the success with a southern Eddy County, N.M., test of the Wolfcamp B interval in the Cotton Draw area. On the company’s earnings call, he said the 3-mile lateral delivered 6,500 boe/d, with estimated recoveries trending toward “almost 3 million boe.”
“It’s not bad for a secondary target,” he said.
Devon’s Williston Basin remains one of its best drivers of oil rates, with the company’s $865 million RimRock bolt-on helping to increase oil production by 30% compared to the second quarter.
“The team is also making substantial progress integrating the RimRock acquisition into our operations,” Gaspar said. “And because of this transaction, we expect volumes to take another step up to around 65,000 boe per day by year-end. This enhanced production profile now puts our Williston asset on pace to generate around $1 billion of cash flow for this year.”
The company’s Williston team has worked exceptionally hard to maintain performance, he said but also acknowledged that as the company takes over an acquisition, “no doubt about it, there’s going to be handoffs and little bumps in the road. There was a particular pad that came in. We had some delays.”
The company continues to assess its more recently closed $1.8 billion Validus acquisition.
Devon has identified roughly 500 economic opportunities across the Validus acreage. The inventory “allows us to sustain the high-margin production from our Eagle Ford assets for years to come,” Gaspar said.
The company is also evaluating refracturing opportunities, which he said are “a little hard to quantify. We’re working on that now.”
The Validus acquisition doubles its scale in the Eagle Ford and a repeatable resource play in the “best part of the Karnes Trough” oil window, he said. Devon expects to see a $50 million annual cash flow savings from capital efficiencies, operating improvements and marketing synergies.
“Furthermore, the core of the Eagle Ford … is proving to be one of the best opportunities in the world for downspacing, redevelopment, refracs and also EOR,” Gaspar said.
Deckelbaum noted that Devon’s dividend payments also fell 12% per share, compared to the second-quarter dividend, to $1.35/share. The payment is tied to a fixed dividend and a variable dividend that represents 50% of excess free cash flow. Deckelbaum said the payout now represents a 7% annualized yield.
Devon’s dividend is up 61% compared to third-quarter 2021.
During the third quarter, Devon repurchased $100 million of shares and has executed $1.3 billion of its $2 billion buyback authorization. The company is also targeting $1 billion in debt retirement into the next year.
But Gaspar acknowledged that the company is battling inflation like other producers.
“Look, there is inflation out there. We’ve never been hiding from inflation. It’s real,” he said. “As we renew contracts, we see that continue to tick up.”
However, Gaspar believes the company is starting to see a crest in pricing.
“We will continue to monitor that,” he said. “I think it’s too early to say how that manifests over the course of 2023.”
Gaspar also said that the work Devon is doing now on drilling activity to prepare for 2023 will show up in wells spud in November and December.
“I think we feel pretty good about where we’re at and for the trajectory for  as well,” he added.
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