Funtay
Devon Energy (NYSE:DVN) is an oil and gas company with a market cap of $27.22 billion.
In my last article covering Devon Energy, I gave the company a ‘strong buy’ recommendation. Since that article was published on August 17, 2023, Devon Energy has declined 12.15% and currently trades at around $42.50 per share.
In that article, I highlighted the fact that Devon Energy had struggled over the course of 2009 to 2021 and appears to be on a new and better path after merging with WPX Energy in January 2021. I’ve had other oil and gas recommendations that I’ve stood by, despite a drop in price. However, as I’ve analyzed the oil and gas sector with more depth, I realize there are relatively more attractive companies than Devon Energy and so despite giving Devon Energy a Strong Buy, I do not think it is on the same level as some other companies its size. Therefore, I’m rating Devon Energy to a ‘Buy’ rating. I often try to measure this via a company’s production and so as I discuss the outlook for Devon Energy, it appears they will have challenges with production growth in 2024. Some of that is oil price related of course and tempering capital expenditures in the light of lower oil prices.
Overview
The company saw 5 percent production volume growth QoQ in the Delaware Basin, where its flagship asset sits within the larger Permian Basin.
Permian Basin Acres (Devon Energy Q3 Net Acres)
The next slide shows the company’s Q3 highlights. This slide paints a very positive picture for Devon Energy. As we will see in a later slide, the company is becoming more capital efficient, thus generating a higher rate of return on capital deployed. I appreciate the bullet point two in the slide below where they show their production per share increasing 10 percent. Obviously, this is a product of share buybacks in conjunction with increases in production, which is a good way to look at it and this is a metric I may consider tracking with each company in the future.
Devon Energy Q3 Key Takeaways (Devon Energy Q3 Presentation)
Since 2021, the company has been able to reduce shares outstanding with a $3 billion buyback program that has reduced shares by 6 percent. There is $900 million remaining in the current program and the company has increased this amount three times since the program began.
Devon Energy Share Buybacks (Share Repurchase Program)
Balance Sheet
| (millions) | 2020 | 2021 | 2022 | 2023 Q3 |
|
Assets |
9,912 | 21,025 | 23,721 | 24,241 |
| Debt | 6,893 | 11,626 | 12,425 | 12,462 |
| Debt-to-Assets | .695 | .553 | .523 | .514 |
Source: Seeking Alpha
The company’s balance sheet is relatively strong. The company has $12.46 billion in total liabilities and $3.3 billion of that is short-term liabilities. Below is a graphic showing the company’s long-term debt maturities with the amounts. Below that is the table from the company’s Q3 10Q that shows their total long-term debt schedule.
Devon Energy Debt Plan Q3 2023 (Devon Energy Q3 Presentation)
Devon Energy LT Notes Due Q3 2023 (Devon Energy Q3 10Q)
Inventory
The company has 1.2 million net acres in United States resource plays which the company continues to assess. As of today, they believe that they have at least 12 years of profitable drilling inventory at current prices. The company projects that as they continue in their assessment of their holdings, the actual inventory will be greater than 20 years.
Devon Energy Inventory (Devon Energy Q3 Presentation)
The company claims to have the fourth most inventory of any company in the Delaware Basin, which bodes well for them. Two other companies that likely have larger positions in the basin, although not named in the slide, are EOG Resources (EOG) and Chevron (CVX).
Devon Energy Delaware Basin Inventory (Devon Energy Q3 Presentation)
Cash Flow
| 2021 | 2022 | 2023 TTM | |
| Operating Cash Flow | 4,899 | 8,530 | 6,718 |
| Capital Expenditure | (2,007) | (5,125) | (3,848) |
| Free Cash Flow | 2,892 | 3,405 | 2,870 |
Source: Seeking Alpha
The company’s cash flows have remained strong through 2023, even as prices have fallen. In this period since 2022 where oil prices have tempered into the $70 to $80 range, Devon Energy and companies like it have tried to continue to find ways to become more capital efficient.
Below is the slide exemplifying the company’s improved capital efficiency. Despite the company not projecting increasing production in 2024, the company expects significant increases in free cash flow thanks to increased capital efficiency. Production is not expected to increase in 2024 and so it will be impressive if Devon is able to increase free cash flow while maintaining level production and significantly reduced capital efficiency. If they are able to do this, I believe that will be a major accomplishment.
Devon Energy Capital Efficiency (Devon Energy Q3 2023 Presentation)
Production
The table below shows the company’s quarter-by-quarter production growth.
| Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 Projected | |
| Oil(Mbod) | 288 | 300 | 294 | 316 | 320 | 323 | 321 | NA |
| NGL(Mbod) | 136 | 156 | 154 | 148 | 149 | 164 | 166 | NA |
| Natural Gas(Mmcf) | 906 | 961 | 1,000 | 1,034 | 1,030 | 1,054 | 1,070 | NA |
| Combined(Mboed) | 575 | 616 | 614 | 636 | 641 | 662 | 665 | ~650 |
Devon Energy production By Basin (Devon Energy Q3 2023 Presentation)
Although the company’s production isn’t expected to see an increase in the coming year, the company should see an increase in the production per share as a portion of the company’s free cash flow is deployed towards share buybacks.
Devon Energy Q3 Results and Outlook (Devon Energy Q3 Presentation)
The company expects static production throughout 2024. The company dropped a frac crew in the Delaware Basin temporarily in Q3 in order for it to increase its drilled and uncompleted (DUC) inventory. This decline in activity is what will lead to the company’s flat production from the Delaware Basin in 2024. If oil prices were more favorable, the company would likely increase its drilling activity rather than drop a completion crew to increase its DUC inventory. With Devon’s Delaware Basin production not growing in 2024, I would expect the company-wide production to also be relatively flat.
Devon Energy 2024 Delaware Basin Production Expectations (Devon Q3 Presentation)
Risks
The primary risk for Devon Energy is similar to any commodity-based company and that is that their primary products, oil and natural gas, decline in price and demand. Plainly, I do not expect energy prices to decline much further from here, however, this is always the risk with investing in this type of business. Given Devon Energy has more leverage on its balance sheet than similar companies in the space means Devon Energy would be more negatively affected by a decline in energy prices. That said, investors will want to find ways to hedge against a continually devalued dollar and I believe energy investing is one method of doing that. There is an inextricable link between money and energy and if you don’t think so, then you should study the history of the petrodollar more thoroughly as well as bitcoin, more recently.
Conclusion
In conclusion, Devon Energy is going to have a relatively flat year when it comes to production increases in 2024. The company will still deploy capital toward share buybacks as well as dividends which will provide yield for investors and is derived from a return on capital expenditures. However, once again, I would rather invest in companies that are finding projects where both production can grow while maintaining capital return to shareholders and a strong balance sheet. Right now, Devon Energy appears content to maintain its production and deploy more capital towards share buybacks and dividends. Given that oil prices have dropped to where they are currently($70 to $80), this is a balancing act that many companies in the sector are likely facing/considering. To reiterate, I rate Devon Energy a buy.
