Devon expects lower Q1 production, higher full-year capex

Feb. 16, 2023
Chief financial officer Jeff Ritenour says inflation in the company’s supply chain remains a major problem.

Executives with Devon Energy Corp., Oklahoma City, say first-quarter 2023 production volume will be impacted by infrastructure outages in the Delaware basin, among other factors, and are forecasting full-year capital expenditures higher than analysts had been expecting.

Shares of the company (Ticker: DVN) fell more than 11% to $57.22 on heavy trading volume Feb. 15, wiping out more than $4 billion in value.

Devon expects first-quarter production will be about 635,000 boe/d, up 10% from the year-ago number related in part to acquisitions, but essentially flat with fourth-quarter 2022, which executives in January guided down due to severe winter weather (OGJ Online, Jan. 10, 2023). That’s due primarily to a late-January fire at a key third-party compressor station that executives expect will be repaired and back online by mid-March. Also contributing is some ethane rejection.

President and chief executive officer Rick Muncrief said production should grow steadily starting in this year's second quarter to average roughly 660,000 boe/d for the last 9 months of the year. Devon executives are forecasting the company will bring online 90 wells in the first quarter and average 105 wells/quarter the rest of the year.

In turn, capex will be more heavily weighted toward first- 2023: Some $1.8-1.9 billion is being allocated to the year's first two quarters, when Devon will have a temporary fourth fracturing crew in the Delaware basin. In second-half 2023, quarterly capex of $810-850 million is expected.

The full-year forecast of $3.6-3.8 billion, however, is more than 6% above analysts’ expectations; Devon executives said inflation remains a major concern and has pushed the company’s break-even funding level for capex to about $40/bbl compared with $30 a year ago. Chief financial officer Jeff Ritenour said Devon last year benefited from having locked in parts and labor prices as inflation increased, but that those benefits are fading.

“You’re starting to see some of that unwind now,” Ritenour told analysts on a conference call discussing quarterly results. “That's really what’s driven that break-even higher [...] We’ve seen anywhere between 30% and 50%...inflation depending on which cost category you’re talking about. That’s what we’re walking into in 2023.”

Devon posted a fourth-quarter profit of $1.2 billion, down from $1.5 billion in the last 3 months of 2021. Revenues rose slightly to just under $4.3 billion but production expenses climbed 18% to $715 million and the company’s tax bill more than doubled to $349 million.

Details of the production guidance include:

  • Devon expects to run 16 rigs this year and devote about 60% of its capital to the Wolfcamp formation.
  • Well productivity is expected to be in line with 2022 levels. "We're we're kind of claiming that as a victory, honestly. When you look at the maturation of the overall resource plays and where some of the rest of the industry is, we continue to see kind of flat productivity," said Clay Gaspar, chief operating officer.
  • The 2022 acquisition of Validus helped Eagle Ford production nearly double year over year to 68,000 boe/d (OGJ Online, Aug. 9, 2022). For 2023, Devon plans to run three rigs in the basin, focusing on recently acquired acreage in Karnes County, Texas.