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Will 4Q16 Mark a Low Point in Devon Energy’s Production Volumes?

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Production

Devon Energy’s (DVN) 4Q16 production came in slightly above the mid-point of its 4Q16 production guidance range of 524–546 Mboepd (thousand barrels of oil equivalent per day). DVN attributed the better-than-expected production to “the substantial improvement in well productivity” in the US resource plays and to an impressive ~14% increase in heavy oil production at its Jackfish complex in Canada compared to the 4Q15 period.

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Production growth

Sequentially, Devon Energy’s 4Q16 production is lower by ~7% when compared with 3Q16. On a year-over-year basis, Devon Energy’s 4Q16 production is lower by ~21% when compared with 4Q15. DVN’s steep decline in year-over-year production can be attributable to its non-core assets divestiture program where DVN sold non-core upstream assets that were producing ~73 Mboepd. Devon Energy sold these assets between April and July 2016.

Shift to higher-margin production

For 4Q16, DVN reported crude oil (USO) and bitumen production of 244 MBbls (thousand barrels) per day, natural gas liquids production of 90 MBbls per day, and natural gas (UNG) production of 1,221 MMcf (million cubic feet) per day. When compared with 4Q15, Devon Energy’s crude oil and bitumen production is down by ~12%, natural gas liquids production is down by ~35%, and natural gas production is down by ~23%, respectively.

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Devon Energy’s crude oil and bitumen percentage in production mix rose from 44% in 3Q16 to ~45% in 4Q16. As per DVN’s 4Q16 operations report, crude oil and bitumen are its highest margin products. To further enhance the profitability of production, Devon Energy rejected ~12,000 barrels per day of ethane during 4Q16.

Production guidance

Per DVN’s press release, the 4Q16 production profile represents a low point for the company. According to Devon, it’s planning to accelerate the growth in its high margin oil production from 1Q17. In 2017, DVN is expecting to drive its oil production growth in a range of 13%–17% compared to 4Q16. DVN’s peer ConocoPhillips (COP) has plans to increase crude oil percentage in its production mix by means of divesting natural gas properties in 2017.

Next, we’ll take a look at how DVN’s lower production affected its operating cash flow and free cash flow.

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