Devon's Pre-Q2 Earnings Analysis: Should You Buy or Hold?

Devon Energy Corporation DVN is expected to report an improvement in its top and bottom lines when it reports second-quarter 2024 results on Aug 6, after the market close.

The Zacks Consensus Estimate for DVN's second-quarter revenues is pegged at $3.86 billion, indicating an 11.9% increase from the year-ago reported figure.

The consensus estimate for earnings is pegged at $1.29 per share. The Zacks Consensus Estimate for DVN's second-quarter earnings has remained unchanged in the past 60 days. The estimate suggests year-over-year growth of 9.3%.

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Solid Earnings Surprise History

Devon's earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 3.38%.

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What the Zacks Model Unveils

Our proven model does not conclusively predict an earnings beat for Devon Energy this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. That is not the case here, as you can see below.

Factors Likely to Have Shaped DVN's Q2 Earnings

Devon Energy continues to benefit from its multi-basin portfolio and high-margin assets. Increased productivity from the wells placed online during the first half of 2024 is likely to have been a primary contributor to strong production volumes. Expected production volumes in the range of 670,000 to 690,000 barrels of oil equivalents per day are likely to have been driven by higher completion activity in the Delaware Basin, resulting from the fourth frac crew Devon put to work at the beginning of the year in the core of Southeast New Mexico.

Second-quarter earnings are expected to have benefited from effective cost management, which is likely to keep operating expenses within the guidance level and boost margins.

The easing of infrastructure constraints across Devon's Delaware Basin assets, through the steps taken by the company and third-party partners in the build-out of incremental gas processing, compression, water handling and electrification, is likely to have contributed to second-quarter performance.

Stable free cash flow generation is expected to have continued in the second quarter as well, which assisted in increasing shareholders' value. The ongoing share repurchases have lowered the shares outstanding level of the company, which is likely to have had a positive impact on second-quarter earnings.

Price Performance and Valuation

DVN's shares have gained 14.2% in the past six months compared with the industry's rally of 15.1%.

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Devon Energy shares are somewhat inexpensive on a relative basis, with its current trailing 12-month Enterprise Value/Earnings before Interest Tax Depreciation and Amortization (EV/EBITDA TTM) being 4.81 compared with its industry average of 7.79.

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Some of the other operators in the same space, like APA Corporation APA, Chesapeake Energy CHK and EOG Resources Inc. EOG, are trading at a higher value compared with Devon. The shares of APA, CHK and EOG are trading at current trailing 12-months EV/EBITDA multiple of 7.15, 5.08 and 5.67, respectively.

Investment Thesis

The highly productive multi-basin domestic assets of Devon Energy are the primary contributor to its strong performance. Devon's acquisition of RimRock Oil and Gas LP and the decision to acquire the Williston Basin business of Grayson Mill Energy will enable the company to maintain high-margin production and strong free cash flow for years to come. Devon Energy has significant financial flexibility and has been reducing its debt, which is lowering its annual interest expenses.

The company's current ratio currently stands at 1.04, indicating its financial strength to meet near-term debt obligations.

Still-high interest rates are a concern. A highly competitive oil and gas industry might limit Devon's capacity to apply for new drilling rights or acquire properties due to competitors who are financially stronger than Devon with more resources at their disposal.

To Sum Up

Devon's high-quality domestic assets with a balanced exposure to oil, natural gas and NGL production and its low-cost production structure boost margins. The company is presently trading at a discount.

Those who already own this stock would do well to retain it in their portfolio.

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