Company Reports

Following our review of narrow-moat-rated Devon's first-quarter results, we raise our fair value estimate by roughly 6% to $55. First-quarter production of roughly 664 thousand barrels of oil equivalent per day, or mboe/d, exceeded guidance by some 4%. On the heels of the outperformance in the Delaware Basin, where we expect strong volume growth in 2024, management had sufficient conviction to raise full-year 2024 production to 665 mboe/d at the midpoint, or up roughly 2% versus prior guidance. Our newly expected production nears the high end of the revised range and predominantly drives our revised fair value.

Devon Energy is an oil and gas producer based in Oklahoma. It has assets in several shale basins across the United States, including the Delaware Basin, Eagle Ford Shale, STACK, and Powder River Basin. Management has reshuffled the portfolio in the last few years, divesting its Canadian oil sands business and exiting the Barnett Shale natural gas play. In January 2021, it combined with another Oklahoma-based shale firm, WPX Energy, in a “merger of equals” that significantly expanded Devon’s Delaware Basin exposure and added a small position in the core of the Bakken Shale fairway in North Dakota. The merger brought economies of scale and more efficient field operations, and enhanced the competitiveness of the combined firm.

Each year, we reevaluate well productivity for our entire US shale coverage. For each covered company, we scrutinize third-party data on both a basin and region basis. As in prior years, our process prompted mostly modest valuation changes but left our moat, capital allocation, and uncertainty ratings unchanged.

Devon Energy is an oil and gas producer based in Oklahoma. It has assets in several shale basins across the United States, including the Delaware Basin, Eagle Ford Shale, STACK, and Powder River Basin. Management has reshuffled the portfolio in the last few years, divesting its Canadian oil sands business and exiting the Barnett Shale natural gas play. In January 2021, it combined with another Oklahoma-based shale firm, WPX Energy, in a “merger of equals” that significantly expanded Devon’s Delaware Basin exposure and added a small position in the core of the Bakken Shale fairway in North Dakota. The merger brought economies of scale and more efficient field operations, and enhanced the competitiveness of the combined firm.

Excluding the impact of derivatives, Devon Energy's sales marginally exceeded our fourth-quarter expectations, while production of 662 thousand barrels of oil equivalent per day, or mboe/d, exceeded our expectations of 637 mboe/d. However, production expenses were also a bit higher than we anticipated. Consequently, core earnings missed our expectations by roughly 5%. Our long-term view is relatively unchanged, though we will reduce our fair value estimate by $1 to $59 as we front-end load additional capital expenditures. However, 2024 production of 650 mboe/d was right in line with our expectations.

Devon Energy is an oil and gas producer based in Oklahoma. It has assets in several shale basins across the United States, including the Delaware Basin, Eagle Ford Shale, STACK, and Powder River Basin. Management has reshuffled the portfolio in the last few years, divesting its Canadian oil sands business and exiting the Barnett Shale natural gas play. In January 2021, it combined with another Oklahoma-based shale firm, WPX Energy, in a “merger of equals” that significantly expanded Devon’s Delaware Basin exposure and added a small position in the core of the Bakken Shale fairway in North Dakota. The merger brought economies of scale and more efficient field operations, and enhanced the competitiveness of the combined firm.

Devon Energy is an oil and gas producer based in Oklahoma. It has assets in several shale basins across the United States, including the Delaware Basin, Eagle Ford Shale, STACK, and Powder River Basin. Management has reshuffled the portfolio in the last few years, divesting its Canadian oil sands business and exiting the Barnett Shale natural gas play. In January 2021, it combined with another Oklahoma-based shale firm, WPX Energy, in a “merger of equals” that significantly expanded Devon’s Delaware Basin exposure and added a small position in the core of the Bakken Shale fairway in North Dakota. The merger brought economies of scale and more efficient field operations, and enhanced the competitiveness of the combined firm.

Devon Energy is an oil and gas producer based in Oklahoma. It has assets in several shale basins across the United States, including the Delaware Basin, Eagle Ford Shale, STACK, and Powder River Basin. Management has reshuffled the portfolio in the last few years, divesting its Canadian oil sands business and exiting the Barnett Shale natural gas play. In January 2021, it combined with another Oklahoma-based shale firm, WPX Energy, in a “merger of equals” that significantly expanded Devon’s Delaware Basin exposure and added a small position in the core of the Bakken Shale fairway in North Dakota. The merger brought economies of scale and more efficient field operations, and enhanced the competitiveness of the combined firm.

Devon Energy is an oil and gas producer based in Oklahoma. It has assets in several shale basins across the United States, including the Delaware Basin, Eagle Ford Shale, STACK, and Powder River Basin. Management has reshuffled the portfolio in the last few years, divesting its Canadian oil sands business and exiting the Barnett Shale natural gas play. In January 2021, it combined with another Oklahoma-based shale firm, WPX Energy, in a “merger of equals” that significantly expanded Devon’s Delaware Basin exposure and added a small position in the core of the Bakken Shale fairway in North Dakota. The merger brought economies of scale and more efficient field operations, and enhanced the competitiveness of the combined firm.

Devon Energy generated flat quarter-over-quarter production growth, delivering 665 thousand barrels of oil equivalent per day in the third quarter, just shy of guidance midpoint. We anticipate subdued production activity through year-end, mainly due to declines in the Williston basin and the removal of the fourth Delaware basin frac crew. As a result, we’re lowering our fair value estimate slightly to $60 from $61. Our narrow moat rating is unchanged.

We have adjusted our valuation methodology for U.S. exploration and production companies. Our multistage DCF valuation incorporates five years of explicit projections for a fixed period, typically five years. Terminal values are derived by assuming firms eventually earn their cost of capital in perpetuity. This contrasts with our previous methodology, which modeled the harvesting of all company assets over a 30-year timeframe. The change brings our E&P valuations in line with Morningstar’s standard equity research methodology.

Devon Energy is an oil and gas producer based in Oklahoma. It has assets in several shale basins across the United States, including the Delaware Basin, Eagle Ford Shale, STACK, and Powder River Basin. Management has reshuffled the portfolio in the last few years, divesting its Canadian oil sands business and exiting the Barnett Shale natural gas play. In January 2021, it combined with another Oklahoma-based shale firm, WPX Energy, in a “merger of equals” that significantly expanded Devon’s Delaware Basin exposure and added a small position in the core of the Bakken Shale fairway in North Dakota. The merger brought economies of scale and more efficient field operations, and enhanced the competitiveness of the combined firm.

Devon posted production volumes near the top end of management guidance, at 662 thousand barrels of oil equivalent per day, compared with 664 mboe/d at the midpoint (up 4% sequentially). But the upside is explained by accelerating activity into the second quarter that was planned for the back half of the year. The firm was always planning a front-loaded capital program, with a temporary fourth fracking crew in the Permian in the first half of the year only. This was expected to drive a third-quarter peak in completion activity, but the surge came early (new wells went from 97 in the first quarter to 131 in the second, and updated guidance calls for 90 in the third quarter). There’s no change to the full-year outlook for production or capital spending, and the firm anticipates a similar cadence in 2024.

We're lowering our fair value for Devon Energy to $38 from $42 after taking a second look at the firm's first-quarter operating and financial results. The reduction was influenced by our updated forecast for crude oil basis differentials across the portfolio. We were previously expecting the firmwide weighted average realized crude price to line up with the WTI benchmark in the next few years, with premium prices in some areas offsetting discounts elsewhere (which is broadly what happened in 2022). This now feels optimistic, as differentials slightly weakened in most of Devon's operating areas, and our updated model incorporates a weighted average discount of 1%. In addition, the near-term outlook for benchmark crude and natural gas prices has deteriorated sharply since our last update in February. And while we previously highlighted several positive takeaways from the quarter, including better-than-expected production and lower-than-expected operating costs, we believe we were already capturing these benefits in our model. The net impact on our valuation is therefore negative, and the update puts Devon stock in 2-star territory, even after the market selloff in the first trading session after the release.

Devon Energy is an oil and gas producer based in Oklahoma. It has assets in several shale basins across the United States, including the Delaware Basin, Eagle Ford Shale, STACK, and Powder River Basin. Management has reshuffled the portfolio in the last few years, divesting its Canadian oil sands business and exiting the Barnett Shale natural gas play. In January 2021, it combined with another Oklahoma-based shale firm, WPX Energy, in a “merger of equals” that significantly expanded Devon’s Delaware Basin exposure and added a small position in the core of the Bakken Shale fairway in North Dakota. The merger brought economies of scale and more efficient field operations, and enhanced the competitiveness of the combined firm.

Devon enjoyed a solid first quarter, beating the midpoint of production guidance by 1% for both oil and oil equivalents. Management attributed this to better-than-expected asset performance across the portfolio, but the Exotic Cat Raider project in the Delaware Basin was the standout (comprising six wells drilled with 3-mile laterals, with the top well averaging 7,200 barrels of oil equivalent per day in the first month of production). Meanwhile, lease operating expense rose less than expected due to lower commodity prices (which translates to lower fuel costs). And general and administrative expense was within guidance, but 12% lower sequentially due to merger synergies. On the negative side, realized prices for oil and natural gas liquids declined 4% and 2%, respectively—not out of line from what other firms have reported. But overall, margins were still better than expected, leading to adjusted earning per share exceeding FactSet consensus by 6%. We intend to incorporate these results shortly, but after this first look our $42 per share fair value estimate and narrow moat rating are unchanged.

Severe winter weather was a huge drag on Devon’s fourth-quarter financial and operating results. Production came in below the low end of management guidance, capping earnings below Street estimates (EBITDA and adjusted EPS were 3% and 4% respectively, below FactSet consensus estimates). And to make matters worse, management now expects Delaware Basin infrastructure outages and other constraints to crimp first-quarter volumes in the region by 10 thousand barrels of oil equivalent per day (2%). The announcement triggered a 12% decline for Devon shares and probably exacerbated a sectorwide selloff as investors weighed the potential read-through for peers operating in similar areas that have yet to report fourth-quarter results.

Devon Energy is an oil and gas producer based in Oklahoma. It has assets in several shale basins across the United States, including the Delaware Basin, Eagle Ford Shale, STACK, and Powder River Basin. Management has reshuffled the portfolio in the last few years, divesting its Canadian oil sands business and exiting the Barnett Shale natural gas play. In January 2021, it combined with another Oklahoma-based shale firm, WPX Energy, in a “merger of equals” that significantly expanded Devon’s Delaware Basin exposure and added a small position in the core of the Bakken Shale fairway in North Dakota. The merger brought economies of scale and more efficient field operations, and enhanced the competitiveness of the combined firm.

When we published our initial take on Devon's third-quarter financial and operating results, we argued that the firm is executing well on its development plan, maintaining impressive capital discipline, and benefiting from a second-to-none cost advantage in the U.S. upstream space that supports its narrow economic moat rating. However, we also suggested that the market has gotten carried away with the current commodity environment and is expecting favorable conditions to persist. In contrast, we do not expect oil and natural gas prices to remain indefinitely above marginal supply costs ($55 for WTI and $3.30/mcf for U.S. natural gas). Exploration and production, or E&P, stocks currently appear to be discounting a long-term WTI price of about $65-$70, making the whole sector look richly valued.

Devon Energy is an oil and gas producer based in Oklahoma. It has assets in several shale basins across the United States, including the Delaware Basin, Eagle Ford Shale, STACK, and Powder River Basin. Management has reshuffled the portfolio in the last few years, divesting its Canadian oil sands business and exiting the Barnett Shale natural gas play. In January 2021, it combined with another Oklahoma-based shale firm, WPX Energy, in a “merger of equals” that significantly expanded Devon’s Delaware Basin exposure and added a small position in the core of the Bakken Shale fairway in North Dakota (near the intersection of Dunn, Mountrail, and McKenzie counties). The merger brought economies of scale and more efficient field operations, and enhanced the competitiveness of the combined firm.