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Morningstar | Devon Posts Stronger-Than-Expected Production in 1Q; But Not Enough to Move Our $30 FVE

We're leaving our fair value estimate for no-moat Devon Energy unchanged at $30 per share following the release of first-quarter results. Devon posted a solid first quarter with light-oil production above management's guidance and capital expenditures below guidance. The company posted volumes of 529 thousand barrels of oil equivalent per day, well above the high-end of guidance, driven by strong U.S. shale performance. Production declined about 1% sequentially, with Canadian heavy-oil production accounting for the dip.

Owing to strong results from its core U.S. shale assets, management raised the midpoint of its light-oil production to 17% year-over-year growth from 15%. We've adjusted our production forecast accordingly, but it wasn't enough to move the needle on our fair value estimate after accounting for other tweaks to our model. The company is holding steady on its capital expenditures guidance for the year, which is in line with our estimates.

Devon continues to move forward with its plan to separate its Canadian heavy-oil and Barnett shale assets, a move that was announced earlier this year. The transaction will give the new Devon a better growth outlook and an improved cost structure at the company level, but we don't expect the separation will create intrinsic value. If anything, it's a tough time to sell the Canadian assets with price realizations versus West Texas Intermediate depressed due to temporary takeaway capacity constraints. It will be interesting to see what kind of value Devon can generate from those assets, if a sale is the method of separation.