Crude oil prices in downtrend
In the last two years, the “lower for longer” trend in crude oil prices has not only seen the value of crude oil decline by ~64%, but it has also taken its toll on crude oil producers.
When crude oil prices are in a decline, the profit margin for crude oil producers becomes adversely affected, making their stock prices fall along with crude oil prices. Devon Energy (DVN) is no exception to this, and its stock price has fallen by ~54% since crude oil prices peaked in June 2014.
Among the other producers. Pioneer Natural Resources (PXD), EOG Resources (EOG), Occidental Petroleum (OXY), and Southwestern Energy (SWN) saw their share prices decline by ~31%, ~30%, ~24%, and ~73%, respectively, during the same period.
The volatility in oil prices also impacts ETFs and ETNs like the ProShares UltraShort Bloomberg Crude Oil ETF (SCO), the Vanguard Energy ETF (VDE), and the VelocityShares 3x Long Crude Oil ETN (UWTI).
Devon Energy’s downtrend
As shown in the above chart, Devon Energy’s (DVN) stock price is in a downtrend where it is making a clear pattern of lower highs and lower lows. In the first phase of the crude oil price decline, DVN outperformed the crude oil prices, but as the realization of “lower for longer” set in, DVN’s stock price fell more than crude oil prices in the second phase of the crude oil price decline. Steep reductions in earnings due to lower crude oil prices contributed to these price movements.
The downtrend caused DVN’s stock price to break the 200-day moving average in September 2014. Since then, DVN tried to regain its 200-day moving average twice, but it failed to hold above it. In early May 2016, Devon regained its 200-day moving average successfully and is currently trading ~7% above it.
Devon Energy’s 1Q16 earnings
In 1Q16, excluding the one-time items, Devon Energy reported a loss of $0.53 per share, $0.10 better than the consensus for a loss of $0.63 per share. Due to lower realized crude oil prices, its revenues fell by ~35% year-over-year to ~$2.11 billion.
What do these headline numbers mean? Are these numbers good or bad for Devon Energy? Why is DVN’s stock price is stretched below its 200-day moving average? We will answer all these questions in this series by studying Devon Energy’s earnings, past events, various fundamental ratios, and key drivers for its stock.
Let’s start with the Devon Energy’s 1Q16 earnings call.