Analyst Note| Dave Meats, CFA |
After incorporating Devon’s second-quarter results, we’ve increased our fair value estimate to $33 from $29. The increase was partly driven by a more positive outlook for near-term oil and gas prices since our last update, coupled with a reduction in our cost of capital assumption to 9.5% (reflecting the firm’s further improved balance sheet). The change also gives credit for further efficiency gains and thus lower production costs, particularly in the Delaware Basin.
The firm performed well in the second quarter, with total production of 566.8 mboe/d (3% higher than the midpoint, and above the top end, of the guidance range). And the firm’s financial results were similarly strong, with adjusted EBITDA and adjusted EPS coming in at $1.198 billion and $0.60 respectively (FactSet consensus estimates were $1.107 billion and $0.52). This was achieved despite lower-than-expected capital spending, with unit operating expenses declining at the same time. Management attributed the outperformance to efficiency gains, improved well performance, and merger-related synergies. Nevertheless, the 2021 plan was largely intact, with an unchanged budget and a modest hike to natural gas liquids volume guidance only. We think that leaves room for further outperformance in the back half of the year.