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Understanding Devon Energy’s Hedging Activities

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Devon Energy’s hedging advantage

In 4Q15, crude oil and bitumen hedging activities increased Devon Energy’s (DVN) average realized crude oil and bitumen price by $24.36 per barrel. Excluding hedges, the 4Q15 average realized price for DVN’s crude oil and bitumen production was $29.31 per barrel. This means that commodity hedging activities increased DVN’s average realized crude oil and bitumen price by ~83%.

According to DVN’s 4Q15 earnings press release, its revenues from oil, natural gas, and natural gas liquids sales totaled $1.1 billion in 4Q15. Cash settlements related to oil and natural gas hedges caused revenue to rise by more than $700 million in the same quarter.

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DVN’s 2016 hedges

In 2016, DVN has call options on NYMEX West Texas Intermediate crude oil for 19,000 barrels per day at a weighted average price of $73.18 per barrel. As of December 31, 2015, DVN has derivative coverage for only ~3% of forecast crude oil production for 2016.

For 2016, DVN has fixed price swaps on natural gas for 55,000 mmBtu (million British thermal units) per day at a weighted average price of $3.17 per mmBtu.

DVN’s production costs

For 4Q15, DVN’s filed level operating cost, which includes its lease operating expense (or LOE) and production tax, was $8.82 per boe (barrel of oil equivalent), ~20% lower compared to 4Q14.

In 4Q15, DVN’s LOE was $7.66 per boe, ~18% lower compared to 4Q14. Other S&P 500 (SPY) upstream companies such as ConocoPhillips (COP), Cabot Oil & Gas (COG), and Hess (HES) have LOEs of $10.75 per boe, $5.6 per boe, and $15.12 per boe, respectively.

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