OKLAHOMA CITY—- Devon Energy has announced its operational and financial results for the first quarter of 2017. Also included within the release is the company’s guidance outlook for the second quarter and full-year 2017.
Highlights
- Oil production from U.S. resource plays exceeds expectations
- Operational momentum builds with strong results from new well activity
- Higher-value production expands operating cash flow by 54 percent
- Low cost structure to further improve by year end
- Multi-year production growth and cash flow expansion targets on track
“Devon’s development programs delivered strong growth in high-value production, significantly enhancing profitability in the first quarter,” said Dave Hager, president and CEO. “Driven by outstanding well productivity from our U.S. resource plays, light-oil production increased by 17 percent in the quarter, exceeding guidance by a wide margin. Importantly, we were able to deliver this outperformance with a low cost structure that is expected to further improve as we progress through the year.”
“Looking ahead, we expect our operational momentum to build as we continue to accelerate investment across our world-class U.S. drilling programs and shift to full-field development,” said Hager. “With excellent first-quarter results in hand, we are firmly on track to achieve our multi-year growth targets and deliver peer-leading cash flow expansion.”
U.S. Resource Plays Drive Oil and Top-Line Production Beat
Devon’s oil-driven capital program delivered strong production results in the first quarter. Oil production averaged 261,000 barrels per day, a 7 percent increase compared to the fourth quarter of 2016. This result exceeded the top end of the company’s guidance range by 5,000 barrels per day.
The strong growth in oil production was driven entirely by Devon’s U.S. resource plays, where the company is attaining the highest margins within its portfolio. In total, U.S. oil production reached 123,000 barrels per day in the first quarter, a 17 percent increase compared to the previous quarter. The robust production growth was largely attributable to higher completion activity across the company’s Eagle Ford and STACK operations.
In Canada, production from Devon’s heavy-oil operations averaged 138,000 barrels per day in the first quarter, a 9 percent increase year over year. This growth was driven by the company’s Jackfish complex, where gross production increased to a record 125,100 barrels per day in the quarter, exceeding nameplate capacity by nearly 20 percent.
Overall, total companywide production averaged 563,000 oil-equivalent barrels (Boe) per day in the first quarter, a 5 percent increase compared to the fourth quarter of 2016. With Devon’s strong growth in higher-value production, oil is the largest component of Devon’s product mix at 46 percent.
Operational Momentum Builds in U.S. Resource Plays
Devon continued to accelerate investment across its asset portfolio and exited the first quarter with 15 rigs running (includes Eagle Ford partner activity). With these higher activity levels, the company continued to build operational momentum across its world-class U.S. resource plays by commencing production on more than 70 new wells in the quarter that achieved 30-day rates averaging 1,800 Boe per day.
For additional details regarding these prolific well results and other information about Devon’s E&P operations, please refer to the company’s first-quarter 2017 operations report at www.devonenergy.com. Highlights from the report include:
- Wolfcamp program achieves record well result
- Woodford Shale delivering strong well productivity in Hobson Row
- STACK appraisal activity confirms fourth landing zone
- Eagle Ford “diamond stack” pilot successful
- Jackfish 3 exceeds nameplate capacity by more than 30 percent
- Powder River Basin produces prolific well results
Upstream Revenue Advances and EnLink Profitability Expands
Revenue from oil, natural gas and natural gas liquids sales totaled $1.3 billion in the first quarter, a 59 percent improvement compared to the first quarter of 2016. The strong year-over-year revenue growth was driven by higher commodity price realizations and a shift in Devon’s product mix to higher-margin oil production.
The company’s midstream business generated $207 million of operating profit in the first quarter, driven entirely by Devon’s strategic investment in EnLink Midstream. Devon has a 64 percent ownership in EnLink’s general partner (NYSE: ENLC) and a 24 percent interest in the limited partner (NYSE: ENLK). In aggregate, the company’s ownership in EnLink has a market value of approximately $4 billion and is expected to generate cash distributions of approximately $270 million annually.
Low Cost Structure to Further Improve by Year End
Devon’s successful cost-reduction initiatives have achieved more than a $1 billion of annualized operating and general and administrative expenses (G&A) savings compared to peak levels in 2014. In the first quarter, Devon continued to effectively control costs with lease operating expenses (LOE) totaling $386 million or $7.62 per Boe. This result was in line with company guidance and was $58 million lower than the first quarter of 2016.
G&A expenses were also in line with expectations, amounting to $181 million in the quarter. Excluding costs associated with EnLink, Devon’s overhead expense for the quarter was $145 million. Devon’s first-quarter G&A expense included $27 million of non-cash stock compensation.
Importantly, the company’s low cost structure is expected to further improve on a per-unit basis in the second half of 2017. This per-unit improvement is driven by the combination of higher production rates from the company’s U.S. resource plays and relatively flat LOE costs, resulting from efficiency gains within its field operations.
Financial Strength Provides Significant Flexibility
Devon’s financial position remains exceptionally strong, with investment-grade credit ratings and excellent liquidity. The company exited the first quarter with $2.1 billion of cash on hand and, having made $2.5 billion of debt repayments in 2016, Devon has no significant debt maturities until mid-2021.
Further bolstering financial strength is the company’s attractive hedge position in 2017. Devon currently has more than 50 percent of its estimated oil and gas production protected for the remainder of 2017 and is in the process of accumulating additional hedges in 2018. This disciplined, risk-management program consists of systematic hedges added on a quarterly basis and discretionary hedges that take advantage of favorable market conditions.
Operating Cash Flow Expands 54 Percent
Devon’s reported net earnings totaled $565 million or $1.07 per diluted share in the first quarter. Adjusting for items securities analysts typically exclude from their published estimates, the company’s core earnings totaled $217 million or $0.41 per diluted share in the first quarter, exceeding consensus expectations.
The company’s profitability in the first quarter was attributable to strong production growth, higher commodity prices and an improved cost structure. These factors also strengthened Devon’s operating cash flow to $834 million, a 54 percent increase from the fourth quarter of 2016.
Multi-Year Growth Targets Firmly on Track
Based on the strong first-quarter operating performance, Devon is firmly on track to deliver on its previously announced U.S. oil production growth targets of 13 to 17 percent in 2017 (compared to the fourth quarter of 2016). This high-margin growth will be driven by Devon’s STACK and Delaware Basin assets, which are projected to deliver top-line production growth of greater than 30 percent in 2017.
To achieve these growth targets, the company expects to invest between $2.0 billion and $2.3 billion of E&P capital in 2017 (no change from prior guidance), with nearly 90 percent of the capital dedicated to U.S. resource plays. The company plans to steadily increase drilling activity throughout the year to as many as 20 operated rigs by year end.
Looking ahead to 2018, the operational momentum created by accelerated drilling activity in the STACK and Delaware Basin is expected to expand light-oil production in the U.S. by approximately 20 percent compared to 2017.
Second-Quarter Production Outlook
Detailed forward-looking guidance for the second quarter and full-year 2017 is provided later in the release. Of note, in the second quarter, Devon expects oil production to range from 230,000 to 240,000 barrels per day due to a planned turnaround at the company’s Jackfish 3 facility and the timing of completions and new well tie-ins within the U.S.
The reduced completion and tie-in activity in the second quarter within the U.S. is expected to be driven entirely by the company’s Eagle Ford asset. In the first quarter, due to efficiency gains, the company and its partner brought online more wells in the Eagle Ford than planned. In spite of this timing difference, the company’s capital and production plan is on track for both the first half of 2017 and the full year.
