Why Devon Energy fell
Canadian oil accounts for ~43.4% of Devon Energy’s total oil production and contributes ~22.3% to its total upstream revenues based on the latest results. The average gap between WTI and WCS (Western Canada Select) prices, the benchmark for Devon Energy’s Canadian oil production, has widened 52.6% in the fourth quarter compared to the previous quarter. Falling oil prices and the widening WTI-WCS spread might be impacting the stock. Around 54%–56.5% of Devon Energy’s Canadian oil production in the fourth quarter has been hedged at a weighted average differential of $16.41 per barrel to WTI.
The fall in the utilization of the Midwest Refinery Operable Capacity last month might have widened the gap between these two grades of oil. Canadian oil accounts for 99% of Midwest refiners’ input. Midwest refiners consume 63.9% of the total Canadian oil input to US refiners. Canadian oil exports to the US account for 99% of its total oil exports.
With the recovery in the Midwest refinery utilization rate this month, the WTI-WCS spread might contract more. On November 30, the spread contracted 39.4% from its highest point in the quarter. During this period, Devon Energy lost 12.9%—the second-highest decline on our list of upstream stocks. The target price cut by many financial institutions might be behind Devon Energy’s downturn.
In November, US upstream stocks including ConocoPhillips (COP), Occidental Petroleum (OXY), Apache (APA), Concho Resources (CXO), and EOG Resources (EOG) returned -5.3%, -1.9%, 4.8%, -0.6% and -6.3%. These stocks are the S&P 500 Index’s top holdings in the upstream energy space. US crude oil January futures and Brent crude oil February futures fell 22.2% and 20.8%, respectively, during this period.