In a May 8 research note, analyst John Freeman reported that Raymond James increased its target price on Devon Energy Corp. (DVN:NYSE) after updating its estimates on the company. "Devon delivered a solid Q1/20, reporting modest beats on oil volumes, capex and pricing" and is making "solid progress on cost reductions," Freeman highlighted.
The new target price is $15 per share, up from $11. In comparison, Devon Energy's current share price is about $11.53.
Freeman discussed the Oklahoma-based company's results and cost improvements of Q1/20.
Regarding performance, Freeman noted that Devon's Delaware Basin asset, which accounts for 75% of its production, continues to deliver. During Q1/20, it averaged IP30 of 2,500 barrels of oil equivalent per day at an average well cost of $705 per foot.
Devon expects total 2020 oil production to be 145–150 million barrels of oil per day (145–150 MMbbl/d), roughly in line with Raymond James' forecast of 151.9 MMbbl/d and consensus' projection of 150.5 MMbbl/d.
Devon's oil volumes guidance for Q2/20 is 145–155 MMbbl/d. This compares to previous projections by Raymond James and the Street of 156 MMbbl/d and 154 MMbbl/d, respectively. The pace of completions will remain slower throughout Q2/20 and Q3/20 and then ramp up in Q4/10.
As for costs, "Devon's off to a good start" with Q1/20 cash costs coming in 6% below Raymond James' prediction, Freeman indicated. For example, the Wolfcamp well cost during the quarter was 17% lower than in Q1/19.
Capital guidance for Q2/20 is $200–250 million as opposed to previous estimates by Raymond James of $193 million and consensus of $227 million.
Overall, Devon expects to lower its full-year 2020 cash costs, both for production and general and administrative expenses, by $250 million, beating Raymond James' estimate. That includes a 40% drop in executive compensation.
Freeman pointed out that Devon's liquidity at the end of Q1/20 "remains strong" with 1.7 billion in cash and cash equivalents and an undrawn revolver of $3 billion. The company has an outstanding debt balance of $4.3 billion with the earliest maturities taking place in late 2025. During Q1/20, Devon repurchased 2.2 million shares for $38 million but has since suspended the repurchase program to preserve liquidity.
As for the Barnett sale, the closing was delayed, which "is a short-term disappointment," Freeman wrote. "However, with the gas strip currently topping $2.75/thousand cubic feet in Q1/21, the sale looks set to net Devon additional contingency payments beyond the $570 million beginning in 2021," he wrote.
Freeman concluded that accounting for the already made cash cost improvements plus 2020 estimates of about $1 billion in capex and about 150 MMbbl/d of oil production, Devon could generate $60 million in free cash flow this year, excluding the Barnett sale and dividend, according to Raymond James' calculations. Further, the company's robust hedge book, in which about 90% of the remaining oil volumes are hedged at a $42 per barrel floor, protects its cash flow.
Raymond James has an Outperform rating on Devon Energy.
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Disclosures from Raymond James, Devon Energy Corp., May 8, 2020
ANALYST INFORMATION
Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.
The analyst John Freeman, primarily responsible for the preparation of this research report, attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.
RAYMOND JAMES RELATIONSHIP DISCLOSURES
Certain affiliates of the RJ Group expect to receive or intend to seek compensation for investment banking services from all companies under research coverage within the next three months.
Raymond James & Associates, Inc. makes a market in the shares of Devon Energy Corporation.
Raymond James & Associates received non-investment banking securities-related compensation from Devon Energy Corporation within the past 12 months.
Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available here.
