Devon Energy To Bear The Brunt Of Natural Gas Pricing Headwinds In 2Q, Analyst Lowers Estimates

RBC Capital Markets analyst Scott Hanold reiterated a Sector Perform rating on Devon Energy Corporation DVN, lowering the price target to $60 from $63 on the reduced commodity price forecast.

The company is scheduled to release its second-quarter 2023 results on Aug. 1, after the close of U.S. financial markets. 

Operationally, the analyst notes that the performance looks good but natural gas and NGL pricing were headwinds.

The analyst lowered 2Q EPS estimates by $0.49 to $1.18, reflecting lower final benchmark commodity prices and wider price realizations. Both natural gas and NGL prices were likely at or below guidance. 

Hanold expects 2Q capital spending at $985 million, below the midpoint of the $965 million-$1.045 billion guidance and the $1.006 billion consensus estimates. 

DVN hedged 27%/26% of its 2Q23 natural gas and oil production resulting in a $36 million cash gain for the quarter.

For 2Q, the analyst models stock buybacks of ~$300 million, a dip from 1Q23 levels on lower FCF and cash balances.

For 2Q, the analyst calculated FCF generation of $517 million.

However, the analyst thinks 2Q23 activity provides an excellent production trajectory in 3Q23, where oil production should peak at ~330 Mb/d.

Longer term, Hanold forecasts DVN shares to perform in line with the peer group over the next 12 months. 

Over recent years, DVN repositioned its asset portfolio to focus on high-returning, oil-growth properties, emphasizing running the business for shareholder returns.

Price Action: DVN shares are trading lower by 0.86% to $50.65 on the last check Thursday.