Devon Energy Feels Low Commodity Prices

On May 19, 2015, we issued an updated research report on Devon Energy Corporation (NYSE:DVN). Devon is benefiting from the transformational steps taken during 2014. However, the ongoing softness in commodity prices and the highly competitive oil and gas industry could have an adverse impact on Devon’s operations and financial performance.

Devon Energy, a Zacks Rank #3 (Hold) stock, reported weak results in the first quarter with both earnings per share and revenues lagging the Zacks Consensus Estimate. The ongoing weakness in commodity prices is preventing this company to realize the full benefits of its higher production of oil and gas.

Devon’s deep and diversified portfolio, primarily composed of unconventional resources, reflects significant long-term growth potential. Consistent investments made by the company over a period of time are helping it to sustain its strong performance despite the lowered E&P budget for 2015. Devon’s 2015 E&P budget is in the range of $3.9 billion to $4.1 billion, a $250 million reduction in capital spending from the prior forecast. The decline in capex is not going to affect its oil production growth outlook of 25% to 35% for the year.

Devon has resorted to cost-saving initiatives to support its margins in this difficult commodity price environment. As a result of cost containment measures, Devon’s lease operating expenses (LOE), its largest cash cost, were $8.97 per boe, 7% lower than the first quarter of 2014. Devon is looking forward to cash cost savings of nearly $170 million in 2015 from its cost-saving initiatives.

The company’s first-quarter results were lower than expected primarily due to weak commodity prices. The softness in commodity prices is expected to prevail for the best part of the year, affecting Devon’s profitability. In the first quarter of 2015, oil, gas and NGL sales contributed nearly 41% of total revenues, significantly lower than the 69% contribution in the year-ago quarter.

Devon Energy operates in a highly competitive oil and gas industry. Some of the competitors in this industry are financially stronger than Devon with more resources at their disposal. This might limit Devon’s capacity to apply for new drilling rights or acquire properties. Besides the financial muscle, a wide global presence of its competitors enables them to cope with the falling price environment more effectively than Devon.

Some better-ranked stocks in the same industry include Linn Energy LLC (NASDAQ:LINE), WPX Energy (NYSE:WPX) and QEP Resources (NYSE:QEP) (NYSE:QEP), each carrying a Zacks Rank #2 (Buy).

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