Shares of Club holding Devon Energy (DVN) fell sharply Wednesday, one day after delivering disappointing fourth quarter results , reducing its fixed-plus-variable dividend and barely buying back any stock. Forward guidance wasn’t that great either. It’s certainly a frustrating story for sharholders like us, and one that bares further scrutiny. Bottom line Unlike most companies, Devon holds its post-earnings conference call the morning after the release. We heard little to make us want to buy Wednesday’s more than 11% decline. In fact, we are considering whether to exit one of our three exploration and production (E & P) companies. We’re going to reserve judgment on which ones stay and which one goes until we get quarterly results from Coterra Energy (CTRA) and Pioneer Natural Resources (PXD) next week. DVN 1Y mountain Devon Energy (DVN) 1-year performance Devon management on Wednseday did reassure investors of its commitment to financial discipline and shareholder returns. But the unfortunate reality is that oil prices — and therefore Devon’s free cash flow generation and ability to return capital to shareholders — are somewhat out of management’s hands. They can certainly control investment activity and the amount of free cash flow earmarked for the variable portion of the dividend. But there’s little to nothing they can do to influence the actual price of energy commodities to which their fate is tied. It’s worth noting, the breakeven level for Devon on oil is around $40 per barrel — up from about $30 a year ago due to inflation. West Texas Intermediate crude in Wednesday’s trading went for nearly double that, providing a healthy cushion. Production guidance On Devon’s earnings call Wednesday morning, management said that the first quarter is expected to be the lowest production quarter of fiscal 2023. They cited three reasons. One, about 90 wells are expected to be brought online during Q1, so their full benefit won’t be felt until after the quarter. Thereafter, management expects a roughly 15% increase in online wells per quarter. Two, there’s been downtime in the Delaware Basin due to a late-January fire at a compressor station that severely damaged the electrical system and the unit. This is expected to hold back production by about 10,000 barrels of oil-equivalent-per-day (Boe/d). The facility is expected to be back up and running by mid-March, with no impact to second quarter production expected. Lastly, management expects to reject ethane at several processing facilities. Companies do this when demand — and therefore the price of ethane — is low and it doesn’t make financial sense to extract ethane from raw natural gas. This too is expected to be a headwind of about 10,000 Boe/d. Share repurchases Management also addressed the company’s low level of buyback activity in Q4 of just $57 million worth of shares. On the call, the team said they wanted to preserve and build back cash levels to maximize financial flexibility…
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