Devon Energy: Strengths, Weaknesses, Opportunities, Threats

Isac Simon, The Motley Fool
Updated

Devon Energy's (NYS: DVN) fourth-quarter earnings beat estimates. Today, we'll see how this oil and gas exploration and production company fares on a SWOT test. This should help investors develop a more complete picture about the company.

Strengths

  • Devon Energy is a leader in North American onshore E&P activity. At the end of 2011, estimated proved reserves increased to a record 3 billion barrels of oil equivalent (Boe) that are well-diversified across the continent.

  • It has solid control over liquids production and reserves. Oil and natural gas liquids (NGLs) production went up 21% in the fourth quarter compared to the year-ago period. Liquids constituted 35% of total production -- up from 31% a year ago -- and accounted for nearly 60% of total upstream revenues.

  • It ramped up production from its Canadian oil sands reserves. The Jackfish 1 and Jackfish 2 projects saw a year-over-year production hike of 91% in the fourth quarter, with further ramp-up expected in 2012.

  • The company has a strong balance sheet with a cash balance of more than $7 billion and a debt-to-equity below 46%.

Weaknesses

  • Natural gas production still constitutes 65% of total production. Current market conditions aren't really conducive for this commodity.

  • Return on equity -- at 10.5% this past year -- is down from the company's average of 15% since 2004.

  • Return on assets at 7.8% has been below the historical average of 8% since 2004, thanks to the restructuring of business in order to focus exclusively on North American onshore assets.

Opportunities

  • Devon Energy is well-placed to exploit the strong oil and NGLs market. The company achieved an overall 85% reserve replacement ratio in 2011 with liquids reserve replacement being a staggering 230%.

  • The Permian Basin has been instrumental in the company's transition to liquids production, which accounted for 75% of total production out here. With 16 rigs operating in this Texas basin, one can expect further production growth from this region.

  • Devon will jointly develop 1.4 million net acres across the Utica, Niobrara, Mississippian and Tuscaloosa shale plays with Sinopec (NYS: SHI) . Over the course of this year, the companies expect to drill 125 gross wells here.

Threats

  • Cash flows may be affected by low natural gas prices that might not recover in the next five years. 58% of Devon's total proved reserves consist of natural gas.

Foolish bottom line
As of now, the pros seemingly outweigh the cons with a lot of hope held out for the future. Devon is undergoing a major transformation as it transitions into liquids production. Investors must dig deeper. In order to stay up to speed on the top news and analysis on Devon Energy, you can start here by adding it to your watchlist.

At the time thisarticle was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Devon Energy.Motley Fool newsletter serviceshave recommended buying shares of Devon Energy. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Advertisement