First-quarter earnings plunged at Devon Energy Corp. (NYSE: DVN) compared with the same period a year ago. The good news is that expectations were even lower. Excluding items, Devon posted EPS of $1.34 on revenue of $2.15 billion compared with analysts’ expectations for EPS of $1.33 on revenue of $2.24 billion.

Devon’s disappointing results stem from a pre-tax loss of $254 million on a change in the fair value of the company’s hedges. The derivatives loss mirrors yesterday’s announcement from Chesapeake Energy Corp. (NYSE: CHK), which posted a $725 million loss on its hedges. Another energy E&P company that posted a derivatives loss yesterday was Anadarko Petroleum Corp. (NYSE: APC). Anadarko, like Apache Corp. (NYSE: APA) and Occidental Petroleum Corp. (NYSE: OXY) produce more (higher priced) oil than do Chesapeake or Devon, and that is what made the difference.

Devon has hedged about a third of its 2012 daily liquids production. The company has contracts for 22,000 barrels/day at $107/barrel, and 54,000 barrels/day at $126/barrel with a floor of $86/barrel. The hedges cover WTI crude delivered at Cushing, Oklahoma.

Devon has also hedged about 900 million cubic feet of daily natural gas production for the rest of 2011, about 35% of its first quarter average, at $5.24/thousand cubic feet. Another 390 million cubic feet are hedges on 2012 production at an average floor price of $4.93/thousand cubic feet. Natural gas futures are trading today at around $4.63/thousand cubic feet.

There’s really no mystery in Devon’s or Chesapeake’s results. Natural gas prices fell about 16% in the first quarter of 2011, while crude oil and liquids prices continued to rise. Production has increased, but selling more for less simply does not provide a recipe for growth.

Devon is near its total divestment of all its offshore and international assets. The company expects to net about $8 billion from the sales as it positions itself as an onshore, North America-only producer. The company managed to sell its Gulf of Mexico assets to Apache just days before the devastating explosion and oil leak last April. The last remaining asset sale, in Brazil, is expected to close in the second quarter.

Natural gas prices in the US are expected to stay relatively low through 2011, but the summer cooling season that is just around the corner could push prices up enough to help producers like Devon and Chesapeake. Whether the prices will stay high when the heating season starts later in the year is a whole different question.

Devon shares are down more than -3% at about noon today, to $84.62, in a 52-week range of $58.58-$93.56. Chesapeake shares, which lost more than -5% yesterday, are down another -3.5% today, at $30.25, in a 52-week range of $19.62-$35.95. Anadarko shares are off -3.25%, to $75.96, in a 52-week range of $34.54-$85.50.

Paul Ausick

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