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  1. Home
  2. / Investing
  3. / Energy

The Curious Case of Devon Energy

Another Oklahoma-based oil and gas company faces tough times amid a challenging energy enviroment.
By CARLETON ENGLISH Jan 21, 2016 | 10:45 AM EST
Stocks quotes in this article: DVN

While the difficulties oil and gas companies have faced in an era of low prices have been well documented, it was still somewhat surprising that Devon Energy (DVN) announced layoffs on Wednesday.

"The company has not determined the extent of the reduction but expects the majority of layoffs to occur by the end of the first quarter," a spokesperson of the company said in an emailed statement to Real Money. Local Oklahoma news outlets reported that the company said the layoffs were "necessary" for the company's near-term cost management efforts.

Layoffs, reduced capital expenditures, and far more dramatic cost-cutting measures have been seen all over the industry since the price of oil began its steep decline since June 2014. What makes Devon's layoffs curious are statements the company made in December, which suggested the company's financial position would be stronger in 2016.

In December, Devon announced plans to acquire Felix Energy and interest in the Powder River Basin, which totalled $2.5 billion. The transactions have since closed and were financed with a mix of equity and cash. In a presentation, from December, the company said the cash portion, which totaled $1.15 billion would initially be funded with debt. The company did not provide more details on the debt financing when asked by Real Money.

During the same December presentation, the company announced plans to divest itself of non-core assets. Its planned sale of its Canadian-based Access Pipeline would be used to fund its 2016 capital program. The company also said it was targetting the sale of other assets. The proceeds of these efforts were expected to generate $2 billion to $3 billion, which would be used to reduce debt. To date, there has been no update on planned asset sales.

While the financials of most companies in this industry are far from pristine given current energy prices, Devon appeared reasonably well positioned. Its current assets are sufficient to meet near-term liabilities. The company also has no significant debt maturities until 2018.

Even so, Moody's put the company on a review for downgrade after Devon Energy announced plans to acquire Felix Energy and the acreage in the Powder River Basin. The company's debt rating is Baa1 at Moody's, which is still investment grade.

"The associated production and cash flows from the acquisitions are expected to be modest in 2016 and 2017 and may not be sufficient to offset our expectation of Devon generating very weak leveraged cash margins, returns and cash flow-based leverage metrics in 2016 and into 2017, even with the assumption of a certain degree of success in Devon's asset divestiture program," Gretchen French of Moody's wrote in a statement that announced the review.

While Devon touted its "track record of execution" in previous divestiture efforts in its December presentation, one has to wonder if the company has been able to find buyers at the prices Devon wants. The recently announced layoffs could mean the company is looking at an especially painful 2016.

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TAGS: Investing | U.S. Equity | Energy

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