Exploration & Production | Quarterly / Earnings Reports | Production | Third Quarter (3Q) Update | Forecast - Production
Devon Surpasses 3Q Production Guidance; 44% Increase YOY
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Devon Energy Corporation reported net earnings of $1.0 billion or $2.48 per common share ($2.47 per diluted share) for the quarter ended Sept. 30, 2014. This compares with third-quarter 2013 net earnings of $429 million or $1.06 per common share ($1.05 per diluted share).
Adjusting for items securities analysts typically exclude from their published estimates, the company earned $552 million or $1.34 per diluted share in the third quarter. This represents a 4 percent increase in adjusted earnings compared to the third quarter of 2013.
Devon generated cash flow from operations totaling $1.6 billion in the third quarter. Combined with $2.3 billion of pre-tax proceeds from the sale of non-core U.S. assets, Devon’s total cash inflows for the quarter approached $4 billion.
John Richels, president and CEO, commented: "Devon’s repositioned portfolio delivered outstanding growth in production and margins in the third quarter. With our strong position in many of North America’s best resource plays and our focused efforts to deliver high-quality performance, we saw profitability continue to expand.
"Based on our strong year-to-date results and the confidence we have in our portfolio, we are raising our full-year production growth outlook to 14 percent, up from our previous guidance of 11 percent. And we are delivering this incremental production growth without any increase in capital spending."
Operations Report
Highlights:
- Raising the Bone Spring type curve
- Eagle Ford on track to meet production targets
- Canadian heavy-oil results outperform guidance
- Raising Cana-Woodford type curve
- Powder River Basin delivers high-rate development wells
Oil Production Exceeds Expectations
In the third quarter, total production from Devon’s retained assets averaged 640,000 oil-equivalent barrels (Boe) per day. This result exceeded the company’s guidance range and represents a 19 percent increase year over year. Oil and liquids production accounted for 55 percent of the company’s retained asset production mix in the third quarter.
Devon delivered record oil production in North America during the third quarter of 2014. Oil production from retained assets averaged 216,000 barrels per day, exceeding the top end of the company’s guidance range by 6,000 barrels per day. This represents a 44 percent increase compared to the third quarter of 2013. The most significant growth came from the company’s U.S. operations, where oil production increased a substantial 77 percent year over year.
Growth in U.S. production was largely attributable to strong results from Devon’s oil development plays:
Devon's Eagle Ford Production Jumps 76% to 87 MBOE/d
Devon Sees Strongest Permian Results in the Bone Spring
Devon Hits First Oil at Jackfish Three Project
Full-Year Production Outlook Raised
Based on year-to-date results and Devon’s fourth-quarter outlook, most operating and financial metrics remain relatively unchanged compared to previous full-year guidance disclosures. A notable update is the company raising the midpoint of its 2014 production outlook from retained assets by 3 percent to approximately 617,000 Boe per day. This incremental production growth is expected to be delivered without additional capital spending.
Portfolio Transformation Complete
On Aug. 29, Devon closed the sale of its U.S. non-core assets for $2.3 billion, officially completing its portfolio transformation announced last November. In less than a year, the company transformed its portfolio through three significant steps: an accretive Eagle Ford entry, the creation of EnLink Midstream, and the sale of more than $5 billion of non-core properties in both the U.S. and Canada.
Devon’s retained asset portfolio is now concentrated in some of the most attractive North American resource plays. This formidable and focused asset base creates a platform that supports competitive, high-margin growth for many years.
Oil Revenue Grows and Margins Expand
Revenue from oil, natural gas and natural gas liquids sales totaled $2.6 billion in the third quarter, an 11 percent increase compared to the third quarter of 2013. This growth in revenue was attributable to the company’s significant increase in oil production, partially offset by the sale of gas-weighted divestiture assets in both the U.S. and Canada. Third-quarter oil sales accounted for 63 percent of Devon’s total upstream revenues.
Devon’s marketing and midstream operating profit reached $219 million, which exceeded the company’s guidance and represented a 68 percent increase compared to the third quarter of 2013. The year-over-year increase in operating profit was due to expanded margins related to EnLink Midstream.
The company’s strong cost-containment efforts were reflected in third-quarter expense results. Pre-tax cash costs totaled $16.06 per Boe, a 3 percent decrease compared to the previous quarter. Costs in several categories were lower than guidance, most notably Devon’s largest cash cost, lease operating expenses (LOE). On a unit-of-production basis, LOE totaled $9.47 per Boe, flat compared to the year-ago period and 1 percent lower than the second quarter of 2014.
Overall, the benefits of higher-margin oil production and a low-cost structure resulted in expanded cash margin for Devon. Pre-tax cash margin reached $29.42 per Boe in the third quarter, a 20 percent increase compared to the year-ago period.
Balance Sheet and Liquidity Remain Strong
With investment-grade credit ratings and cash balances of $3.4 billion at the end of the third quarter, Devon’s financial position remains exceptionally strong. At Sept. 30, the company’s net debt totaled $8.7 billion, of which $1.9 billion was attributable to the consolidation of EnLink Midstream and is non-recourse to Devon.
Subsequent to quarter end, in mid-October, Devon announced the redemption of $1.9 billion in senior notes, utilizing a portion of its asset divestiture proceeds. This redemption includes all of the company’s outstanding 2.4% senior notes due 2016, 1.2% senior notes due 2016 and 1.875% senior notes due 2017. Upon redemption later in the month, Devon will complete the debt repayment plan associated with its portfolio transformation.
Attractive Hedges Protect Future Cash Flow
With rapid growth in high-margin production, the company has taken measures to protect its future cash flow. For the fourth quarter of 2014, the company has entered into various swap-and-collar contracts to hedge approximately 60 percent of its expected oil production at an average floor price of $92 per barrel. Nearly 80 percent of Devon’s expected fourth-quarter natural gas production is locked in at an average floor price of $4.28 per thousand cubic feet.
For full-year 2015, the company has 138,000 barrels per day protected through swaps and collars at an average floor price of $91 per barrel. Devon also has 0.5 billion cubic feet per day hedged at an average floor price of $4.20. These hedge positions cover more than 50 percent of Devon’s expected oil production in 2015 and around 30 percent of gas production.