The Devon in the Details, a Bunt (DVN, APA, XOM, CVX, COP)

Before the market opened this morning, Devon Energy (NYSE:DVN) reported third quarter net income of $2.6 billion (EPS of $5.92) on revenue of $5.99 billion. After backing out a non-cash gain from derivatives of $1.6 billion, the company’s earnings were $3.09, three pennies higher than consensus estimates. Revenue handily surpassed estimates of $4.02 billion.

Production for the quarter was up 3% year-over-year at 637,000 barrelsof oil equivalent per day. Realized prices for natural gas were$10.25/thousand cubic feet, and $118.52/b of crude oil. That’s anincrease of 66% for natural gas and 56% for crude. Expenses also jumpednearly 25% from the same period a year ago.

A competitor E&P company, Apache Corporation (NYSE:APA), reportedsolid earnings last week, but because much of its production is outsidethe US, realized prices were significantly less than those earned byDevon. Apache reported realized prices for crude of $101.04/b andprices for natural gas of $7.43/thousand cubic feet. Apache’sproduction fell 9% in the quarter, compared with a year ago, and 7%sequentially. Apache’s costs also increased by 40% year over year.

Devon is the biggest player in the Barnett Shale, and produced anaverage of 1.1 billion cubic feet per day from about 3,800 wells. Thecompany expects to reach production of 1.2 billion cubic feet per dayby the end of 2008.

Neither company provided new guidance other than to say that both planto keep on keeping on. That is not impressing investors at the openthis morning. The overall DJIA is down about 1.4%. Both Devon andApache are down about twice that, probably because crude is down morethan $2/barrel and natural gas futures are also down around 1%.

There’s no avoiding the fact that high commodity prices drive profitsat pure-play E&P companies. It may not be fair, but it’s realitythat if costs continue to rise and commodity prices do not, it won’t beonly E&P companies that take hits to their share prices. Theintegrated oil majors like Exxon (NYSE:XOM), Chevron (NYSE:CVX), andConocoPhillips (NYSE:COP) are in the same boat.

Paul Ausick
November 5, 2008