Shares of Devon Energy Corp., Oklahoma City, fell nearly 10% Nov 2 after the company raised its capital spending forecast and said 2023 production growth will likely be closer to zero than 5%. Third-quarter profits, though, more than doubled from the prior-year period to nearly $1.9 billion even though total oil equivalent production grew just 1% to 614,000 boe/d.
Devon’s bottom line in the 3 months ended Sept. 30 was helped year over year by higher realized prices (nearly $65 versus $47) that produced a cash margin of $51.90 compared with $37.17 in third-quarter 2021 but was down from a little more than $60 in this year's second quarter. Free cash flow grew to $1.5 billion for the quarter and the company is on pace to produce full-year free cash flows of $6.3 billion, more than double 2021’s $2.9 billion.
Some investors focused on president and chief executive officer Rick Muncrief and his team saying the company’s variable dividend (which is based on excess free cash flows) will be smaller than in second-quarter 2022 but the stock’s drop was attributed more to concerns about the company’s guidance on production and spending, particularly in light of continued inflationary pressures.
Devon executives said they expect fourth-quarter production volumes to grow to 640,000-660,000 boe/d, helped by the $1.8 billion Eagle Ford purchase in September of Validus Energy and its $865 million July deal for RimRock Oil & Gas in the Williston basin (OGJ Online, June 9, 2022). Looking ahead, Muncrief said – without offering full guidance – that Devon will grow its output in 2023 growth but added that volume growth is likely to be in “the bottom half” of a targeted growth range of 0-5% from its expected yearend level.
“We could pull back on less efficient rigs when considering the incremental activity we’ve recently added,” Muncrief said while noting that Devon will make the Delaware basin the focal point of its capital program. “We still expect to experience some additional upward pressure on costs as contracts refresh, especially in the second half of the year, but price discovery is still ongoing and very sensitive to industry activity levels and commodity pricing.”
That dynamic shows in Devon leaders’ guidance for fourth-quarter capital spending of $845-915 million. That includes capex for Validus and RimRock assets but is substantially higher than the $688 million from the third quarter (and $572 million quarterly average from first-half 2022) as well as far above analysts’ consensus estimate of $768 million.
In afternoon trading, Devon shares (Ticker: DVN) were changing hands around $69.70 compared to their previous close of $77.30. They are, however, still up about 20% over the past 6 months, which has grown the company’s market capitalization to about $46 billion.
