Devon Energy’s stock price fell over 7% on January 31st after the company provided lower than expected earnings guidance for 2023. This abrupt reversal comes despite Devon posting strong profits in 2022, leaving investors confused about the company’s future prospects.
Earnings Report Sparks Selloff
Devon Energy reported solid fourth quarter and full year 2022 results on January 31st. The company generated $4.6 billion in operating cash flow last year, allowing it to pay down debt and return record amounts of cash to shareholders.
However, Devon’s future earnings guidance disappointed the market. Management forecasted 2023 earnings per share between $7.35 and $7.95, below the $8.33 consensus estimate. This stark divergence sparked a rush for the exits, sending Devon shares into a tailspin.
| Devon Energy Key Metrics | 2022 Actual | 2023 Guidance |
|---|---|---|
| Production Growth | 12% | 0-5% |
| Operating Cash Flow | $4.6 billion | $5.5-$6 billion |
| Earnings Per Share | $10.01 | $7.35-$7.95 |
Devon’s reduced growth outlook for 2023 appears to be the primary driver causing investors to dump shares. After increasing oil and gas production by 12% last year, Devon is projecting flattish output gains between 0-5% in 2023. This more restrained growth forecast comes despite sky high energy prices, raising questions about Devon’s ability to organically expand production.
Growth Slowdown Weighs on Sentiment
In the earnings call, Devon CEO Rick Muncrief stressed that the company is taking a “thoughtful, measured approach to capital investment” by budgeting cash flow instead of chasing growth at any cost. Devon expects to generate up to $6 billion in operating cash flow this year, providing funds to pay dividends, buy back shares, and consolidate acreage.
However, this balanced approach resulted in underwhelming 2023 production guidance that frightened investors. Several Wall Street analysts cut their Devon price targets after the report on concerns about tempered growth. For example, Barclays reduced its target 17% from $86 to $71 per share due to the “more conservative outlook.”
Without expectations for robust output gains, Devon lacks a clear catalyst to drive earnings growth this year after last year’s blowout performance. This perceived loss of momentum helps explain the harsh selloff, with investors moving out of Devon and into faster growing energy producers.
What’s Next For Devon Energy?
In the short run, Devon’s share price may remain under pressure if oil and gas markets soften. Any signs of shrinking demand or emerging supply could cause another leg down. However, several analysts remain bullish on Devon for the long term.
Morgan Stanley called Devon its “top pick” in US energy given its strong cash flows and commitment to returning capital. The investment bank actually raised its price target on Devon to $68 per share after earnings. Similarly, Credit Suisse noted the guidance seemed “conservative”, suggesting there could be upside surprises later in the year.
If energy markets stay healthy and Devon delivers on its cash flow forecasts, the stock could regain its momentum later in 2023. With shares now trading nearly 25% below last year’s peak, value-focused investors may view the selloff as a buying opportunity. But in the near term, uncertainty reigns as Wall Street reassesses this newly defensive Devon Energy.
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