Devon Energy Corp Makes Progress

By Markets Fool.com

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While conditions in the oil sector remained brutal during the second quarter, Devon Energy (NYSE: DVN) was still able to make solid progress on its strategic initiatives. The company is now in a much better position -- both operationally and financially -- than it was to start the year, which sets it up for success when industry conditions improve.

Drilling down into the numbers

Weak oil and gas prices continued to weigh on Devon Energy's earnings, leading it to report a net loss of $1.6 billion, or $3.04 per share. That said, the bulk of that loss was due to an impairment charge the company recorded during the quarter. Core earnings, which adjustfor charges like that, were $33 million, or $0.06 per share. That was much better performance than the core loss of $249 million, or $0.53 per share, that the company turned in last quarter.

Three things fueled this stronger performance. First, rebounding oil and gas prices resulted in Devon Energy's realizing $17.97 per barrel of oil equivalent, or BOE, which was 32.8% higher than last quarter. In addition to that, production from the company's core assets exceeded the midpoint of its guidance by 6,000 BOE/d. Finally, operating costs continue to fall, with the company's lease operating expenses (LOE) declining by 26% year over year and coming in 5% below the low end of the company's guidance range.

Devon Energy's cost reduction efforts have really paid off. The company continues to make progress to push down LOE, which is leading it to reduce its guidance range again this quarter. The company now anticipates LOE in the range of $1.6 billion to $1.7 billion, which is $150 million less than it projected last quarter when it reduced guidance by $50 million from its initial projections. Meanwhile, general and administrative expenses continue to plunge and are now down 30% year over year, which is ahead of schedule.

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A look at the outlook

One of the most significant accomplishments Devon made during the quarter was the completion of its asset sale program. Initially, the company planned to sell $2 billion to $3 billion in assets. However, it exceeded that target by announcing $3.2 billion in assets sales. Furthermore, the company did that without having to sell its entire position in the Midland Basin, which it has decided to retain. As a result of this, the company is increasing its production guidance by 18,000 BOE/d, which is 3% higher at the midpoint.

Devon Energy plans to use two-thirds of its asset sale proceeds to pay down debt, with the rest of the cash to be reinvested to accelerate its production growth. In fact, the company had already announced that it is boosting its 2016 capital expenditures budget by $200 million to speed up development in its STACK and Delaware Basin plays in the second half of the year. That said, the company is not yet ready to boost spending any further, especially given the recent 20% slump in oil prices. However, it now has the cash to increase spending once oil prices cooperate.

Investor takeaway

While the tough industry conditions have hurt Devon Energy's earnings, it is starting to mute some of that impact through its cost-cutting measures, as well as its ability to deliver much stronger production. Additionally, the company's asset sale plan was a smashing success, with it exceeding expectations despite retaining a key asset. This is putting the company in a better position -- not only to weather the current downturn, but also to thrive when conditions finally begin to recover.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.