Devon Energy: Chugging Along

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.

08/19/2007 - by Davy Bui

Here are the performance measurements I laid out for Devon in my investment report:

Bring projects online & on time: Jackfish, Polvo, Merganzer.
Hit stated targets:
- Production: 219-221 MMBOE in 2007
- Added reserves: 350-370 MMBOE via drill-bit
Sanction or move along new projects (Kaskida, Cascade, Jackfish 2, Woodford Shale, Jack, Mission Deep, St. Malo, etc).
Control operating cost inflation.
Return cash to shareholders, preferably through dividends.

Net earnings up 5% YOY, flat for the 6 months YOY. Per share, those numbers were +4% for the quarter, down -1% for the 6 months
Operating cash flow before changes to working cap increased 19% for the six months YOY.
Production up 16% for the quarter and +14% for the 6 months.
Marketing & midstream up 13% for the quarter and +1% for the 1st half 2007 YOY.
Per unit operating costs were up 7% & 8% YOY for the quarter and 1st half, respectively.
CapEx came in at $1.3B for the quarter, $2.7B for the 1st half.

Devon didn't give an update on reserves but did give status on a few exploration projects. They moved up the timelines on Saint Malo from early 2008 to 4Q 2007 and the Jackfish 2 project with a proceed decision scheduled for later this year as opposed to mid 2008. They announced the New Lime discovery, expected to produce 9 mcfe/day in 3Q 2007 and the Nectarine discovery @ 10,000 feet in the gulf of Mexico. Other than some minor work in China, operations seem to be on track.

The company raised guidance on operating profits range for marketing and midstream by $30 but unfortunately, matched that with raised guidance on lease, operating and transport costs to a range of $8-8.30 per BOE (up from around $8/BOE). They reiterated production guidance but expect to hit the top end of that range. For the 1st half 2007, price realizations were flat.

Interestingly enough, Devon confirmed the view heard on the Chesapeake Energy conference call about natural gas supply. They think demand for oil sands development will pick up and noted that all the production gains have come from the independents as the major integrateds have declining production profiles. This confirms the bullish prospects for nat gas going forward, not to mention Devon's prospective oil plays in Canada and the Gulf of Mexico.

All in all, a nice quarter from Devon. With the recent market volatility and the peak demand season for oil receding in the rear-view mirror, we look forward to any weakness in the stock to build a larger position while lowering our cost basis. But any hurricane-related setbacks in the Gulf of Mexico could drive the stock price up.

DISCLOSURE: Please see our portfolio page for all disclosures

The Enlightened American

Devon Energy: Chugging Along