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Analyzing Devon Energy’s Production Guidance and 2015 Highlights

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Devon’s production guidance for 4Q15 and fiscal 2015

Devon Energy (DVN) expects to achieve a 4Q15 production level in the range of 662–682 Mboe (thousand barrels of oil equivalent) per day and fiscal 2015 production of 678 Mboe per day. These expectations represent a 9% year-over-year growth in its production levels.

Like Devon, many upstream companies have been ramping up production and raised their initial 2015 guidance. Concho Resources (CXO), Apache (APA), and Marathon Oil (MRO) raised their fiscal 2015 production growth guidances by 28%, 2%, and 7%, respectively. APA, MRO, and DVN make up ~4.2% of the Energy Select Sector SPDR ETF (XLE).

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Devon’s gas-to-oil transition

As we can see in the graph above, Devon’s year-over-year production volumes grew significantly in 3Q15. This was largely driven by Devon’s transition to becoming an oil-heavy player. The company has been ramping up its oil production, which has increased its overall production. The formerly gas-heavy producer has been accelerating oil production, mainly from its Eagle Ford Shale and Canadian-heavy oil projects. Oil production in 3Q15 grew 31% year-over-year. About 74% of the company’s upstream revenue in 3Q15 was from oil.

Cost efficiencies and hedges have served Devon well

In its 3Q15 earnings presentation, DVN noted that its lease operating expenses declined 11% during the quarter to $8.14 per Boe (barrel of oil equivalent) compared to 2Q15. DVN noted that this resulted in savings of more than $60 million in 3Q15. Additionally, Devon also noted that its oil and gas hedges increased its upstream revenue by $600 million in 3Q15. DVN’s earnings release noted that as of September 31, 2015, its remaining commodity hedges had a fair market value of ~$650 million.

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