Devon Energy: Growth Plans Falling Nicely Into Place
02/12/2008 - by Davy Bui
Here are the performance measurements I laid out for Devon in my investment report:
- Performance Measurements (2007):
- 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.
- Results for FY 2007
- Income from continuing operations jumped 19.4% from 2006. Excluding discontinued operations, net margins were up slightly by 70bp at 27.7%, which is impressive given that many operators, big and small, are having trouble in this escalating cost environment.
- Operating cash flow was up 14.7% from 2006.
- Devon produced 224MMBOE in 2007, up 12% from 2006. More impressively, the company replaced that output with 437 MMBOE of proved reserves (390 MMBOE via drill-bit). As the company did not book any reserves from the deepwater Gulf of Mexico, this number is very impressive.
- Marketing & midstream generated operating profit of $509M, up 16.7% from 2006.
- Lease Operating Expenses (LOE) came in at $8.16 per bbl. Finding and development (F&D) costs averaged ~$14. With the cost escalation prevalent in the industry, these numbers were solid.
- CapEx hit $6.1B and was funded entirely from OCF.
By any account, Devon had a great year. They beat guidance on both added reserves and production. All major projects are hitting their timelines, for the most part. Cost containment is going as well as can be expected. The company has hedged about two-thirds of 2008 natural gas production at $8.24 with floors of $7.30. Overall, just an impressive result for Larry Nichols and the team.
The company issued growth-oriented guidance for 2008 and yet, I was left with the sense that these numbers should set a fairly low hurdle for the company. The company has shelved the spin-off of its midstream & marketing assets due to the duress in the financial markets but that segment is more than solid. Employee turnover is low, which is vital in this industry. For 2008, shareholders can expect more growth from the Barnett Shale, Jackfish coming online, more definition of the Woodford/Rockies/Carthage plays and progress on exploration in the GOM and Brazil.
Judging from 2007 results, Devon Energy is one of the best E&P oil/gas companies available on the public markets and definitely a keeper for our portfolio at this point, even as it nears our intrinsic value estimate.
- Revised Performance Measurements (2008):
- Bring projects online & on time: Jackfish by YE 2008, Polvo
- Hit 2008 guidance:
- Production: 240-247 MMBOE
- CapEx: $6.1-$6.4B drill-bit capital ($1B on longer-term, high-impact growth prospects)
- Midstream & Marketing operating profit: $510-550M
- DD&A rate: $12.75-13.25 per BOE/li>
- Added reserves: 390-410 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.
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