Devon Energy Corp. (DVN): Barnett, Jackfish momentum strong; operating costs rising - Goldman Sachs - February 07, 2008
What's changed
Devon reported 4Q2007 adjusted EPS of $1.93, above the First Call consensus estimate of $1.91 but below our estimate of $2.01. Total production was 3.8 Bcfe/d, in line with our estimate. Operating cash flow from continuing operations was $2.2 billion versus our estimate of $1.9 billion. Management’s 2008 production guidance calls for 240-247 MMBOE (7%-10% growth) and rising operating costs. Our new EPS estimates reflect the quarter and changes to production estimates, costs, hedges, etc. 2008, 2009, 2010, 2011, and 2012 (normalized) EPS estimates now are $9.42 ($9.60 previously), $12.90 ($13.24), $11.24 ($11.66), $9.57 ($10.03), and $6.28 ($7.02).
Implications
While Devon Energy’s operating costs appear to be rising to a greater degree than peers, we continue to expect strong relative returns as Devon’s growth is driven by legacy positions in the Barnett Shale and the Canadian oil sands that we believe have attractive relative capital costs. Devon’s relatively low royalty rates in the Barnett versus more recent entrants, and seemingly more limited cost inflation in bringing Jackfish online, are not only driving strong growth and returns in 2008, but through future expansions provide additional visibility. Devon’s combination of exposure to three desirable producing regions in North America—the Barnett, the Canadian oil sands and the Lower Tertiary/Miocene plays in the deepwater Gulf of Mexico—remains unique among large-cap E&Ps.
Valuation
Devon (Not Rated) trades at 5.0X 2008 EV/debt-adjusted cash flow vs. 5.7X for Anadarko Petroleum (Sell), 5.1X for Apache (Buy), 5.2X for Chesapeake Energy (Neutral), 7.3X for EnCana (Sell), 5.5X for EOG Resources (Buy), and 5.9X for XTO Energy (Buy). Our Attractive coverage view on E&P stocks is driven by our bullish view on North American natural gas prices.
Key risks
Commodity volatility, drilling results, cost pressures, gov’t pronouncements. |
