Devon Energy Corporation (DVN) posted better-than-expected results for the second quarter of 2010 driven by increased hydrocarbon realizations. The company’s adjusted EPS for the quarter was $1.53, above the Zacks Consensus Estimate of $1.40.
Quarterly revenues of $2.2 billion fell below the Zacks Consensus Estimate of $2.3 billion, while it rose 23% from prior year revenues. The strong year-over-year performance in the quarter was aided by higher realizations for hydrocarbons. Revenue from oil, natural gas and NGL in the quarter totaled $1.8 billion, up 23%; while marketing and midstream revenues increased 13% to $405 million.
The average oil and gas production in the quarter declined 3% to 58.5 million BOE (i.e. 643,000 BOE per day). The production decline was due mainly to the impact of property divestitures in the Gulf of Mexico. In the quarter, daily production volumes of oil, natural gas and NGL averaged 118.6 thousand barrels (up 1.2%), 2.6 billion cubic feet (down 6.3%) and 88.5 thousand barrels (up 5.5%), respectively. Increases in the liquids production (oil and natural gas liquids) was more than offset by a decline in natural gas volumes.
Devon’s average realized price, excluding the impact of hedges, for oil, natural gas and NGL averaged $62.35 per barrel (up 23%), $3.62 per thousand cubic feet (up 24%) and $30.90 per barrel (up 39%), respectively, in the second quarter.
Devon’s cost reduction measures during the quarter did not pay off well, as lease operating expenses escalated 8% to $442 million. This was mainly due to the stronger Canadian dollar and generally higher expenditures for oilfield services and supplies. Taxes other than income tax also rose 16% to $92 million, driven by higher production taxes resulting from increased oil and gas revenues.
Partially offsetting these were DD&A expense and G&A expense, which declined 1% and 25%, respectively, to $426 million and $130 million. Savings in G&A were due to lower personnel costs and efficiencies gained through strategic repositioning.
In the second quarter, Devon completed the sale of its Gulf of Mexico operations and closed the sale of its Panyu development in the South China Sea. Currently, net proceeds (after-tax) from the sale are about $4.6 billion. The company has also announced sale agreements for the majority of its remaining international assets, which are expected to close in the second half of 2010. Devon expects total proceeds from the divestitures to approximate $10 billion with after-tax proceeds around $8 billion.
As of June 30, 2010, the company had utilized a portion of its total divestiture proceeds to repurchase 7.6 million shares of its common stock for $495 million and to reduce debt balances by $1.7 billion. Devon also used $500 million of the proceeds to acquire a 50% interest in the Kirby-Pike oil sands leases.
Devon maintains a healthy financial and liquidity position. Devon’s operating cash flow in the quarter totaled $1.4 billion. In addition, the company received $2.6 billion (after-tax) divestiture proceeds, which was fully used to fund its capital program – repurchasing $495 million worth of shares and reducing debt balances by $461 million.
Devon exited the quarter with $2.9 billion of cash on hand and $2.7 billion of net debt. At quarter-end, Devon’s net debt to adjusted capitalization was 14%.