The 3 Biggest Threats to Devon Energy in 2017
While Devon Energy (NYSE: DVN) has rebounded by upwards of 20% from its lowest September low and generated more than a billion dollars in cost savings, it’s important to keep in mind the bigger picture. What positive outside factors could fade or falter in the coming months? Here are Devon Energy’s three biggest long-term risks disguised as short-term opportunities.
After more than a year of halved oil prices, and months of failed talks to stabilize production, OPEC members finally agreed on November 30 to cut production by roughly 1.2 million barrels per day (bpd). This landmark deal was followed five days later by 11 non-OPEC nations led by Russia to promise another 558,000 bpd in committed production cuts and bolstered the price of global oil benchmark Brent crude past $55 per barrel, a mark not seen since July 2015.
However, the oil cartel’s basic downfall, the “tendency to cheat” as former Saudi oil minister Ali al-Naimi put it, remains and with production estimates from secondary sources not out until early February, any patterns of deviations from the agreement won’t become apparent until several months into the six-month deal.
And while the International Energy Agency and the US Energy Information Agency (EIA) will be among the secondary sources tracking various countries’ oil production to watch for cheating after the fact, non-OPEC nations such as Russia will simply self-report their production data, further complicating any semblance of rewards and punishments any country has to following the agreement.
However, the oil cartel’s basic downfall, the ‘tendency to cheat’ as former Saudi oil minister Ali al-Naimi put it, remains
Though Devon Energy is a pure North American energy player with a now revised $50 per barrel break-even point, any international shenanigans revealed during OPEC’s first monthly production estimate report in early February could damage market optimism in an already skeptical environment and send both Brent and West Texas Intermediate crude benchmarks back below $50 per barrel.
A major factor domestically has been the rising tide of Donald Trump’s election for not just the energy industry but also the market as a whole, as both the Dow and S&P 500 closed out 2016 with double-digit growth. Although Devon Energy’s stock saw more immediate benefits from the OPEC production cut than the president-elect’s win by a 2:1 factor (nearly 15% versus 7% growth over the two weeks following each event), the Republican’s ascension to the White House would have a more direct and longer-lasting impact on the Oklahoma-based producer.
Between Trump’s plans to effectively halve the corporate tax rate from the more than 35% rate most oil and gas players are currently paying to a flat tax rate of 15% to campaign promises of rolling back regulations impeding American businesses, Devon Energy’s already trimmed and streamlined bottom line looks even better as three-quarters of their proven reserves are in the United States alone.
The catch will be not just if the “Dealmaker-in-Chief” will be able to navigate these ambitious plans past an intransigent congress and a bureaucracy in panic mode, but also if the market’s optimism can be sustained past his first year in office, let alone past Inauguration Day on January 20.
While EIA on December 6 forecast slight growth in US natural gas and oil consumption for 2017, at 0.98% and 1.22% respectively, this inchworm of a gain could be wiped out if the Federal Reserve decides to follow through on their plan to raise interest rates three more times in the coming year. During the initial quarter-point rise on December 14, only the second rate hike in a decade, the “Trump Bump” momentum stalled in the market and led to retrenchments in some stocks.
Consecutive Positive Earnings Reports
With strong financials and a surprise Q3 2016 earnings report increase of 80%, one would be hard-pressed to find better indicators for an energy producer to have steady positive growth. But as Yogi Berra would probably say, current trends only continue until they don’t. And combined with an overly enthusiastic market blinkered for good news, if the next earnings report for Devon Energy in early February shows only mild or even zero growth, the share price may take a dive as investors realize the 80% increase was a one-off.
Not helping the matter are other possible market dampening events such as OPEC’s first monthly production estimate report post-cut, Trump’s first week in office, and another of the Fed’s quarter-point rate cuts, all in early February and all with the possibility to surprise — for the worst.