Devon Energy Research Report - Risks
This report reflects the research and analysis I've performed on this company. It is provided for informational purposes only and does not constitute personalized financial advice nor an endorsement or solicitation to purchase stock in this or any other company. Please do your own due diligence or hire a financial advisor before making any investment decisions.- Updates
- None
- DVN:US research report posted: 2007, July 29
- Risk Detail
- Possible Upside
- Competitor Review
- Valuation and Assessment
- Standard industry risks:
- Commodity price risk. Oil and natural gas prices are extremely volatile.
- Heavier exposure to natural gas, which is not as “glamorous” as oil and highly susceptible to speculations on weather patterns. Its localized nature makes it hard to extract maximum pricing as evidenced by natural gas prices in the Rockies.
- Exploration risk. Actual production may not match estimates. Drilled holes may not be economical. Reserves may be overstated. Etc.
- Rising cost inflation. The whole industry is experiencing higher expenditures from labor to raw materials.
- Currency risk. Oil and gas is priced in US dollars, which is in a long-term depreciation trend against other currencies.
- Worker shortage. Years of underinvestment has led to shortages across the personnel spectrum from crew hands to engineers.
- Company-specific risks:
- Highest visibility growth prospects center around the deepwater Gulf of Mexico plays in the Lower Tertiary, which is subject to weather (hurricane) risk. After the 2005 hurricanes (Katrina, Rita, etc), catastrophe insurance has been hard to come by and as the company puts it, their coverage in this respect is “de minimis.”
- A good portion of company’s operations are located in Canada, where the strengthening loony (C$) has affected bottom-line results to the extent that Devon has shut down conventional resource production in light of escalating operating costs. The combination of rising costs and the exchange rate hit has hurt Canadian results.
- Current liabilities @ $4B are understated by 25% due to additional ~$1B off-balance sheet contractual & lease obligations
- Devon is weighted more towards unconventional resource plays: Texas gas shale, Canadian oil sands, GOM deepwater drilling – all of these carry major engineering challenges and are subject to costly capital expenditures above and beyond conventional oil/gas exploitation.
Author Disclosure: Author is long this stock.
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