We are considering whether to exit one of our three exploration and production companies.
Shares of Club holding Devon Energy (DVN) fell sharply Wednesday, one day after delivering disappointing fourth quarter results , reducing its fixed-plus-variable dividend and barely buying back any stock. Forward guidance wasn’t that great either. It’s certainly a frustrating story for sharholders like us, and one that bares further scrutiny. Bottom line Unlike most companies, Devon holds its post-earnings conference call the morning after the release. We heard little to make us want to buy Wednesday’s more than 11% decline. In fact, we are considering whether to exit one of our three exploration and production (E & P) companies. We’re going to reserve judgment on which ones stay and which one goes until we get quarterly results from Coterra Energy (CTRA) and Pioneer Natural Resources (PXD) next week. DVN 1Y mountain Devon Energy (DVN) 1-year performance Devon management on Wednseday did reassure investors of its commitment to financial discipline and shareholder returns. But the unfortunate reality is that oil prices — and therefore Devon’s free cash flow generation and ability to return capital to shareholders — are somewhat out of management’s hands. They can certainly control investment activity and the amount of free cash flow earmarked for the variable portion of the dividend. But there’s little to nothing they can do to influence the actual price of energy commodities to which their fate is tied. It’s worth noting, the breakeven level for Devon on oil is around $40 per barrel — up from about $30 a year ago due to inflation. West Texas Intermediate crude in Wednesday’s trading went for nearly double that, providing a healthy cushion. Production guidance On Devon’s earnings call Wednesday morning, management said that the first quarter is expected to be the lowest production quarter of fiscal 2023. They cited three reasons. One, about 90 wells are expected to be brought online during Q1, so their full benefit won’t be felt until after the quarter. Thereafter, management expects a roughly 15% increase in online wells per quarter. Two, there’s been downtime in the Delaware Basin due to a late-January fire at a compressor station that severely damaged the electrical system and the unit. This is expected to hold back production by about 10,000 barrels of oil-equivalent-per-day (Boe/d). The facility is expected to be back up and running by mid-March, with no impact to second quarter production expected. Lastly, management expects to reject ethane at several processing facilities. Companies do this when demand — and therefore the price of ethane — is low and it doesn’t make financial sense to extract ethane from raw natural gas. This too is expected to be a headwind of about 10,000 Boe/d. Share repurchases Management also addressed the company’s low level of buyback activity in Q4 of just $57 million worth of shares. On the call, the team said they wanted to preserve and build back cash levels to maximize financial flexibility following large cash outlays associated with recent acquisitions. Going forward, they expect stock repurchases to be more active “especially if [they] see trading weakness relative to [their] peers,” such as what we’re seeing Wednesday. Coterra and Pioneer dropped more than 2% and over 4%, respectively. Not a good day to be sure, but a far cry from the carnage Devon is experiencing. Additionally, with about $700 million remaining under a current $2 billion repurchase authorization, management expects the remainder to be used up by the second quarter, at which point they expect to seek another share repurchase authorization from the board. M & A activity As for merger and acquisition (M & A) activity, management believes that consolidation in the E & P industry is needed, and they are always on the lookout for accretive opportunities. However, they will for now remain disciplined and weigh M & A opportunities against returning capital to shareholders via dividends or buybacks. Energy price outlook @CL.1 1Y mountain WTI crude (@CL.1) 1-year performance In line with the commentary we provided following the late-Tuesday’s earnings release, management believes the operating environment to be supportive of energy prices for several reasons. On the supply side, they cite years of underinvestment in producion capacity — a key pillar of our investment thesis in oilfield services provider Halliburton (HAL); continued sanctions on Russian production due to Moscow’s ongoing war against Ukraine; what they call a “generational low in OPEC’s spare capacity;” and financial discipline from U.S. producers. On the demand side, they cite an increase in the need for energy as global economies grow post-Covid. The most obvious example is the ongoing reopening of the Chinese economy after Beijing abruptly abandoned its strict pandanic policy of zero-Covid. (Jim Cramer’s Charitable Trust is long DVN, CTRA, PXD, HAL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Pipes carry water, steam and oil at Devon Energy Corp.’s 35,000 barrel per day Jackfish Projects plant, where Steam Assisted Gravity Drainage (SAGD) is used to extract bitumen from oil sands, near Conklin, Alberta, Canada.
Jimmy Jeong | Bloomberg | Getty Images
Shares of Club holding Devon Energy (DVN) fell sharply Wednesday, one day after delivering disappointing fourth quarter results, reducing its fixed-plus-variable dividend and barely buying back any stock. Forward guidance wasn’t that great either. It’s certainly a frustrating story for sharholders like us, and one that bares further scrutiny.
