Enerplus Corp T.ERF

RBC on Devon

[retiredcf]

February 27, 2024

Devon Energy Corporation 4Q23 CFPS 3% Beat; Mixed Update

NYSE: DVN | USD 44.32 | Sector Perform | Price Target USD 55.00

Sentiment: Neutral

RBC Quick Take: 4Q23 results were mixed with slightly better cash flow more than offset by higher capital spending. The budget was previously announced, but added details included slightly higher cash operating costs. We expect investor focus to be on (1) timing for capital efficiency improvements and (2) management's interest and appetite for larger M&A. We think this is a mixed update for DVN shares.

Key Focus Points/Highlights

• Total return of capital to shareholders was $501 million, below our $531 million model. Debt reduction equaled $7 million in 4Q23. DVN repurchased 5.2 million shares in 4Q23 at an average price of $45/share or $234 million total, below our $350 million expectation. The company declared a $0.22/share variable dividend, above our $0.09/share model. The fixed dividend was increased by $0.02/share to $0.22/share, representing a 2% yield based on the last close. DVN returned 67% of FCF, inline its target strategy.

• As previously disclosed, in 2024, DVN is setting a cash return target to ~70% of FCF using buyback and variable dividends above the fixed dividend. The company highlighted a desire for future fixed dividend raises.

• Management indicated that its higher allocation to New Mexico and infrastructure additions provide for visible Permian well productivity.

• The 2024 budget and capital outlook was unchanged from its prior outlook. Incremental details indicated slightly higher operating costs.

  4Q23 Earnings Summary

  • Recurring EPS/CFPS of $1.41/$2.65 was a touch above our $1.39/$2.63 estimates and the $1.38/$2.58 consensus estimates. This outperformance was related to higher production and lower cash costs. A slight offset was higher G&A.

• Production of 662 Mboe/d (317 Mb/d oil) was above our 654 Mboe/d (315 Mb/d oil) model and the 652 Mboe/d (315 Mb/d oil) consensus forecasts. Results were above the high-end of DVN's 640-660 Mboe/d (312-318 Mb/d oil) guidance range.

• Capital spending (excluding acquisitions) of $940 million was firmly our $885 million model and the $918 million consensus expectation. Spending was above the high-end of the $870-930 million guidance range.

• DVN generated adjusted FCF of $752 million, below our $784 million estimate related to higher CAPEX.

  2024 Budget & Outlook

  • There were no changes to the 2024 capital budget that was previously set at $3.3-3.6 billion. Our/consensus $3.48 billion estimates are near the midpoint of this range.

• 2024 production is expected to average 650 Mboe/d (312-318 Mb/d oil), inline management's prior commentary of 650 Mboe/ d (315 Mb/d oil). This is below our 655 Mboe/d (315 Mb/d) forecast and the 652 Mboe/d (316 Mb/d oil) consensus estimates on a BOE basis.

• Cash operating costs of $9.40-9.70/boe is above our $9.10/boe estimate.

• 1Q24 Outlook: Production is expected to be between 630-650 Mboe/d (304-310 Mb/d oil), inline management's prior commentary indicating ~305-310 Mb/d oil. This is inline our 643 Mboe/d (307 Mb/d oil) model and the 639 Mboe/d (309 Mb/ d oil) consensus estimates. Capital spending is projected at $915-965 million, above our $897 million estimate and the $892 million consensus forecasts.