Devon Energy Corporation (DVN-NYSE)

Transcription

1 November 24, 2014 Devon Energy Corporation (DVN-NYSE) Current Recommendation Prior Recommendation SUMMARY DATA NEUTRAL Underperform Date of Last Change 01/10/2013 Current Price (11/21/14) $67.20 Target Price $ Week High $ Week Low $55.14 One-Year Return (%) 8.83 Beta 1.30 Average Daily Volume (sh) 4,357,800 Shares Outstanding (mil) 409 Market Capitalization ($mil) $27,485 Short Interest Ratio (days) 1.13 Institutional Ownership (%) 79 Insider Ownership (%) 6 Annual Cash Dividend $0.96 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 6.1 Earnings Per Share (%) N/A Dividend (%) 10.3 using TTM EPS 13.0 using 2014 Estimate 12.5 using 2015 Estimate 12.1 Zacks Rank *: Short Term 1 3 months outlook * Definition / Disclosure on last page 3 - Hold SUMMARY Devon Energy Corporation s third-quarter 2014 earnings per share and revenues beat estimates despite the slide in global oil price, primarily on solid production from its high quality assets and improving gas prices. The company s strategy of divesting non-core assets in the U.S. and Canada, and focusing on reserve-rich onshore U.S. assets is yielding results. Retained North American assets contributed to its strong third-quarter performance. Devon is using the proceeds from non-core asset sales to pay its debts. We expect the company s cash generating capacity and the declining debt level to strengthen its financial position. However, volatile crude oil prices, and cyclical demand for oil, natural gas and natural gas liquids (NGL) could weigh on its profitability. Therefore, we maintain our Neutral recommendation on the stock. Risk Level * Type of Stock Average, Large-Value Industry Oil-Us Exp&Prod Zacks Industry Rank * 213 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,497 A 2,559 A 1,865 A 2,581 A 9,502 A ,972 A 3,091 A 2,710 A 2,624 A 10,397 A ,725 A 4,510 A 5,336 A 2,929 E 16,500 E ,090 E 4,206 E 4,349 E 16,899 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $1.05 A $0.55 A $0.88 A $0.78 A $3.26 A 2013 $0.66 A $1.21 A $1.29 A $1.10 A $4.26 A 2014 $1.34 A $1.40 A $1.34 A $1.29 E $5.37 E 2015 $1.25 E $1.34 E $1.41 E $5.55 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved North Canal Street, Chicago IL 60606

2 OVERVIEW Oklahoma City, OK-based Devon Energy Corporation is an independent energy company engaged primarily in the exploration, development and production of oil and natural gas. The company s oil and gas operations are mainly concentrated in the onshore areas of North America, including the U.S. and Canada. Besides the exploration and production (E&P) business, Devon has marketing and midstream operations, primarily in North America. The marketing and midstream business includes selling gas, crude oil and natural gas liquids (NGL); constructing and operating pipelines; storage and treating facilities; and natural gas processing plants. These midstream facilities are used to transport oil, gas, and NGLs and process natural gas. Over the last few years, Devon s capital spending has primarily been directed towards expanding and developing its oil and liquid-rich assets to achieve a more balanced portfolio. Earlier, Devon reported its financials under the two segments: U.S. and Canada. With creation of EnLink in first-quarter 2014, the company considered EnLink as an operating segment. Currently, Devon has three reporting segments U.S., Canada and EnLink. The U.S. operations are spread in the Permian Basin, Mid-Continent, Rocky Mountains and Gulf Coast. The Canadian holdings are located in the central and southern plains of Alberta and Saskatchewan, northwestern Alberta and northeastern British Columbia, Lloydminster region, the Horn River basin and the Deep Basin. The EnLink segment is engaged in midstream activities. It is a combination of all the U.S. midstream assets of Devon and the properties of the former Crosstex Energy, Inc. and Crosstex Energy, L.P. The segment consists of two entities EnLink Midstream, LLC and EnLink Midstream Partners, LP, and is collectively known as EnLink Midstream. The segment has operations in the Barnett, Permian Basin, Cana and Arkoma Woodford, Eagle Ford, Haynesville, Gulf Coast, Utica and Marcellus Shales. It has wide array of asset base, including around 7,300 miles of gathering and transportation pipelines, 12 processing plants and 6 fractionators. EnLink segment also has barge and rail terminals and product storage facilities. At the end of 2013, Devon had proved reserves of approximately 2.96 billion barrels of oil equivalent (BOE), of which about 52% were natural gas and the rest were liquids. Of the total reserves, 87% belonged to the company s core and emerging properties and the rest to non-core properties. In 2013, Devon s combined production volume was thousand BOE per day, 2% higher than the 2012 level. Source: Company Equity Research DVN Page 2

3 REASONS TO BUY Devon s deep and diversified portfolio, primarily composed of unconventional resources, reflects significant long-term growth potential. The company follows a disciplined capital investment program by allocating resources for development of the Eagle Ford Shale, enhancing operations in the Permian Basin and focusing on other lucrative ventures. In the third quarter, the company invested a total of around $1.67 billion, including roughly $1.31 billion for exploration and production activities. Devon plans total investment in the range of $5.0 $5.4 billion in The Permian Basin remains a vital area for Devon s operations with E&P investment of around $0.34 billion in the third quarter. The company is progressing well towards its Bone Spring horizontal program in the Delaware Basin and multiple Wolfcamp zones in the Permian Basin. In the Eagle Ford region, the company is on track with its development activities in DeWitt County, including the Lower Eagle Ford development program. The company is also active in the Cana-Woodford play in the Anadarko Basin, the Barnett Shale and at the Jackfish 2 and 3 in Canada. Positive outcomes from these projects will boost Devon s future reserves. Devon had completed its non-core divestiture program during the third quarter of In Nov 2013, the company announced an initiative to monetize its non-core assets in both the U.S. and Canada to focus more on high-growth properties besides utilizing the proceeds to reduce debts. In Aug 2014, Devon concluded the sale of its U.S. non-core assets to LINN Energy for $2.3 billion. Since the announcement in last November the company sold or decided to sale non-core assets worth $5.1 billion. During the second quarter, Devon sold the Canadian conventional gas business to Canadian Natural Resources Limited for $2.8 billion. In the first nine months of 2014, the company realized gain of a total of $1.1 billion ($0.6 billion after-tax) from the divestitures. Streamlining of operations will thus help Devon to concentrate on profitable ventures and improve margins in the future. Devon s midstream division, EnLink Midstream, has contributed sizable revenues in the last two quarters. In the third quarter, revenues from EnLink Midstream stood at $855 million, around 16% of the total revenue. This division has contributed 20.6% of the total revenue in the second quarter. EnLink Midstream owns assets in several mineral-rich territories, including the Barnett Shale as well as the Cana and Arkoma Woodford Shales. To solidify EnLink Midstream s operations, Devon plans to adjoin its newly developed Victoria Express Pipeline and Access Pipeline expansion project with EnLink Midstream through a drop-down transaction. Thus EnLink Midstream will be able to serve more upstream players and share higher revenues with Devon, going forward. Devon continues to maintain a stable liquidity position, including cash and cash equivalents of approximately $3.4 billion and available capacity of $3 billion under syndicated senior credit facility as of Sep 30, In addition, the company has efficiency to increase cash flow through operating activities. Devon s operating cash flow during the first nine months of 2014 jumped 25.5% to $5.0 billion from the year-ago level. In 2013, the company s operating cash flow was $1.44 billion compared with $1.14 billion in the prior-year period. Devon s financial position allows it to boost shareholder returns through payment of dividends. In the first nine months of 2014, the company paid around $0.29 billion as dividends on common stock, up 10.8% from the year-ago level. This strategy will help Devon to retain investors interest in the stock. Equity Research DVN Page 3

4 REASONS TO SELL Devon s profitability is subject to oil, natural gas and NGL prices, which are volatile and cyclical in nature. The present glut in oil supply resulting primarily from higher production in the U.S., has resulted in a reduction in oil prices. The ongoing volatility in global oil prices could impact the company s operating results significantly as it depends on sale of crude oil for a considerable portion of its revenues. In the third quarter of 2014, oil, gas and NGL sales contributed 48.5% to the total revenues. If these conditions prevail, the company will fail to generate strong revenues from oil sales in future despite strong production volumes. Devon s operations are subject to numerous U.S. and Canadian rules and regulations. The changes and modification to public policies can affect the operations of the company. Compliance with these provisions and policies would increase operating costs and constrain margins. Oil and gas companies often face risks due to catastrophes like earthquakes and floods. The companies' operations are sometimes halted owing to the damages of the exploration and production infrastructure caused by natural calamities, thereby increasing operating expenses. RECENT NEWS Devon Energy (DVN) Beats Q3 Earnings on Higher Production Nov 4, 2014 Devon Energy Corp. (DVN) reported third-quarter 2014 adjusted earnings per share of $1.34, surpassing the Zacks Consensus Estimate of $1.27 by 5.5%. Earnings were 4% higher than the year-ago quarter on better cost management and higher sales volume. On a GAAP basis, the company reported earnings of $2.47 per share compared with $1.05 per share in the year-ago quarter. The difference between the operating and GAAP number in the reported quarter was due to fair value changes in financial instruments amounting to $1.13 in addition to restructuring costs. Revenue Devon s quarterly revenues of $5,336 million soared 96.6% from $2,714 million in the year-ago quarter and surpassed the Zacks Consensus Estimate of $4,287 million by 24.5%. The upside was due to a whopping 289.1% year-over-year increase in marketing and midstream revenues to $2,000 million. Highlights of the Release Devon s total production of oil, natural gas and natural gas liquids (retained assets) averaged 640,000 barrels of oil equivalent (Boe) per day in the third quarter of The production in the reported quarter exceeded the year-ago level by 18.9%. The increase in oil production from the Permian Basin and Eagle Ford assets helped boost overall production. Devon s domestic oil production increased 77% year over year, which is the primary reason behind the surge. In the reported quarter, Devon s operating profit was $1,774 million, exceeding the year-ago profit by 137.9%. Equity Research DVN Page 4

5 Total operating expenses in third-quarter 2014 increased 79.8% to $3,562 million from $1,981 million in thirdquarter However, total expenses as a percentage of total revenue was 66.7% in the reported quarter as against nearly 73% a year ago. This had a positive impact on margins. Realized Prices Realized oil prices in the quarter were $80.31 per barrel, down 7.2% from $86.51 per barrel in the year-ago quarter. Realized prices for natural gas liquids were down 1.3% to $25.91 per barrel from $26.25 per barrel in the year-ago quarter. Natural gas price realization was up 14.8% year over year to $3.72 per thousand cubic feet (Mcf) from $3.24 per Mcf in the year-ago quarter. On the whole, total realized prices in the third quarter were $41.99 per boe, up 14.3% year over year. Financial Health As of Sep 30, 2014, the company s cash balance totaled $3.41 billion compared with $6.06 billion as of Dec 31, Long-term debt as of Sep 30, 2014, was $10.16 billion, up from $7.96 billion as of Dec 31, The company was however able to lower its debt from the preceding quarter. Capital expenditure in third-quarter 2014 was nearly $1.54 billion. Devon generated cash flow from operations of $5 billion in the first nine months of 2014, up 25.5% year over year. Guidance Devon Energy expects total production in the fourth quarter to be in the range of 630, ,000 Boe per day. Capital expenditure in the final quarter of 2014 is expected to be in the range of $1,590 $1,760 million. VALUATION Devon Energy Corporation s current trailing 12-month earnings multiple is 13.0, compared to the 24.4 average for the peer group and 18.9 for the S&P 500. Over the last five years, the company s shares have traded in the multiple range of trailing 12- month earnings. Currently, the company is trading at a discount to its peers and the S&P 500 on the basis of forward multiple. Our target price of $71.00 reflects a multiple of 13.2x based on 2014 EPS. Equity Research DVN Page 5

6 Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Devon Energy Corporation (DVN) Industry Average N/A 23.1 S&P EOG Resources, Inc. (EOG) Anadarko Petroleum Corporation (APC) N/A 17.1 Apache Corp. (APA) Noble Energy, Inc. (NBL) TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow Devon Energy Corporation (DVN) P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Industry Average N/A S&P N/A 2.0 N/A Equity Research DVN Page 6

7 Earnings Surprise and Estimate Revision History Equity Research DVN Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of DVN. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1033 companies covered: Outperform %, Neutral %, Underperform 6.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Research Analyst Copy Editor Content Ed. Lead Analyst QCA Priyam Bhattacharya Sayantani Sinharoy Jewel Saha Jewel Saha Jewel Saha Equity Research DVN Page 8