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Devon Energy Hits It Out Of The Park, Great Q2

Summary

Devon Energy Corporation had a solid Q2 2016 and recent updates prove that the upstream name plans to seriously cut down its debt load.

Aided by its LOE and G&A costs moving lower, Devon Energy Corporation has been able to lower its OpEx budget.

As Devon Energy Corporation's OpEx budget moved from $2 billion down to $1.6 billion, the firm now sees cash flow neutrality possible with WTI in the $40s/barrel.

Continued operational gains in the STACK region and the Delaware Basin highlight Devon Energy's top tier asset base and helped bring down its required annual spend to keep output flat.

The second quarter of 2016 saw several major positive improvements at Devon Energy Corporation (NYSE:DVN) that will continue to improve its financial position going forward. By selling off acreage in the Midland Basin, East Texas, Oklahoma and elsewhere Devon Energy completed its divestment program, raising a gross $3.2 billion in the process. Not all of that had been received by the end of June, but as the cash rolls in "[t]he majority of the sales proceeds will be utilized to reduce debt and position us to further accelerate investment in our best-in-class U.S. resource plays, led by the STACK and Delaware Basin," according to Devon's CEO.

Source: Devon Energy Corporation Operations Report

For those wondering why Devon Energy Corporation is unloading non-core acreage, here is why. Back in December 2015, Devon Energy bought Felix Energy to increase its position in the very exciting STACK region in Oklahoma and to bulk up its Powder River Basin acreage for future development. Out of the $2.5 billion Devon Energy paid, $1.15 billion was funded with cash and the rest was covered by equity.

Considering the hefty debt load Devon Energy was already carrying, management deemed it prudent to sell off upstream assets that the company had no plans of developing anytime soon. This divestiture program also included selling its 50% stake in the Access Pipeline up in Alberta, which was announced at the very beginning of Q3, that supports its steam-assisted gravity drainage operations at the Jackfish complexes. "At least two-thirds of the sales proceeds are expected to be utilized for debt reduction," which would cut Devon's debt load by ~$2 billion. This will also reduce Devon Energy's interest liabilities, enhancing its cash flow generation.

On August 4, Devon Energy put out a press release noting that it put out a tender to buy up to $1.2 billion of its outstanding debt with a priority put on its 2017 and 2018 maturities. The firm is looking to buy any and all of its 8.25% notes due 2018 ($125 million outstanding) and 6.3% notes due 2019 ($750 million outstanding), with a level one priority on buying up its 2.25% notes due 2018 ($750 million outstanding). Management is swiftly following through with debt reduction efforts, a good sign.

At the end of Q2 2016, Devon had ~$9.3 billion in debt ($350 million due Q4 2016) when excluding debt from its EnLink midstream family. Bringing that down closer to $7 billion, especially if debt reduction is continued in a $50-$60/barrel crude pricing environment, is a bullish move. When factoring in the expected cash proceeds from its asset sales, Devon Energy's net debt load is around ~$4.7 billion.

On the liquidity front, before including expected proceeds, Devon Energy's current assets of ~$4 billion exceeds its current liabilities by slightly over $1 billion. That includes its upcoming maturities, with no major amount of debt due after Q4 2016 until 2H 2018. Add in an undrawn $3 billion revolving credit...


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