Devon Energy (NYSE: DVN) alerted investors in mid-September that Hurricane Harvey had drenched the company's operations in the Eagle Ford Shale in south Texas. Because of that, production from the region would be about 15,000 barrels of oil equivalent per day (BOE/D) less than anticipated. That would have a meaningful impact on its oil output since crude represents about two-thirds this production.
That said, while the storm did cause oil production to come in below the low-end of Devon's initial guidance range, earnings still blew past analysts' expectations because the company had some of the best drilling results in its history.
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Drilling down into the numbers
While crude output came in below its guidance range and fell versus last quarter's rate of 238,000 barrels per day, that was entirely due to the impact of Harvey. If we adjust for the storm, total production would have exceeded the mid-point of the company's guidance range by 6,000 (BOE/D). Fueling that impressive result was 50 high-rate wells that Devon drilled in places like Oklahoma and New Mexico, which on average delivered an initial 30-day rate of more than 2,100 BOE/D.
To put that performance in perspective, rival shale driller Whiting Petroleum (NYSE: WLL) completed 58 wells in the Niobrara Shale of Colorado during the quarter, pushing its production from the region up to 11,750 BOE/D. While that was 78% above the second quarter, it implied that Whiting's wells achieved initial production rates of just a few hundred BOE/D. Devon's ability to get more out of its newest wells enables it to earn better returns and grow quicker than Whiting.
The robust results from Devon's latest wells, when combined with its ability to continue putting downward pressure on costs, helped the company deliver expectation-smashing earnings in the quarter. Overall, the company cut nearly $10 million from its lease operating expenses versus the second quarter and is on pace to reduce costs by an annualized $1.4 billion by year-end.
That helped Devon generate an impressive $776 million in operating cash flow during the quarter, giving it enough money to fully fund capital expenses with plenty to spare. Because of that, and a small non-core asset sale, the company added $400 million to its cash balance during the quarter, boosting it to $2.8 billion. That's $800 million ahead of where it was at the start of the year thanks in part to a 96% year-to-date improvement in cash flow.
A look at what lies ahead
Devon expects to end the year producing 20% more oil than it did at the end of 2016. That would put it right about at the mid-point of its guidance range that output would rise 18% to 23% by year-end, and well above its initial expectations for a 13% to 17% increase. Further, the company can achieve that growth while spending 12% less money than the mid-point of its $2 billion to $2.1 billion budget.
That momentum positions the company to continue growing at a brisk pace, especially when combined with its healthy cash balance and the fact it has hedges in place for 40% of its production in the first half of next year, which locks in a significant portion of anticipated cash flow. While the company has yet to crystallize its 2018 plan, it's initial thought is that it will spend between $2 billion and $2.5 billion next year. That money should fuel more than 30% production growth out of the company's Delaware Basin and STACK plays in 2018, though the aim of the plan isn't to grow production but returns.
A well-oiled machine
Devon Energy's third-quarter results show that the company can thrive in the current operating environment, even when facing an unexpected headwind from Hurricane Harvey. Because of that, the company has the wind at its back as it heads into 2018, where it expects to continue growing production and cash flow at a brisk pace. That could help reverse the slump in Devon's stock, which is down 18% this year even though crude has only fallen 3% and its operations are firing on all cylinders.
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