Monday, August 29, 2022

Today we have a cross-over episode of the Calcbench blog, looking at how two of our favorite subjects — asset valuation and energy prices — factor into the financial picture of Devon Energy.

Devon ($DVN) caught our eye because the company filed its Q2 2022 quarterly report a few weeks ago, and we glanced at changes in the company’s balance sheet over the 18 months or so. There among the assets was a line labeled “Oil and gas property & equipment.” See Figure 1, below; with the line in question shaded in gray.

Do you see what we see? The value of Devon’s oil & gas properties stood at $4.43 billion at the end of 2020, then jumped to $13.82 billion in the first quarter of 2021. What was that about?

The research team’s first thought was “acquisition,” and we soon confirmed that was the case. We jumped over to the Interactive Disclosures page and pulled up Devon Energy’s disclosures for that quarter. Under the heading of Acquisitions, Devon disclosed that it had merged with oil & gas exploration business WPX Corp. that January in an all-stock deal valued at $5.4 billion.

Included in that merger footnote was — wait for it — purchase price allocation! Figure 2, below, shows the assets Devon brought onto its balance sheet after closing the merger with WPX.

Devon acquired $7.02 billion worth of proved oil & gas property and equipment, and $2.37 billion of unproved property & equipment. Add those two numbers to the existing $4.43 billion Devon already had on the books, and you get the $13.82 billion it reported at the end of Q1 2021.

What Comes Next

We also noticed that since then, the value of those oil & gas properties has steadily edged downward to $13.59 billion in Q2 2022 — a drop of only 1.7 percent, while oil prices have gyrated wildly.

Remember, since that deal closed in January 2020, the world first suffered through a pandemic that sent oil prices negative during the lockdowns that year; followed by surging demand in 2021; and then Russia’s invasion of Ukraine this year, which sent gasoline prices to record highs. Throughout all of that, Devon’s property and equipment assets barely budged.

Now, the Calcbench research team are not oil & gas specialists. We assume that line item is holding steady because it’s a long-term investment that will hold value regardless of any particular issues that might shift from one quarter to the next. Our point is simply that we have the data for those analysts who do want to follow oil and gas closely, and sometimes that data can quickly assemble some very interesting stories. That, in turn, will allow you to build more sophisticated models or to ask more pointed and specific questions on the next earnings call.

For example, rival company Marathon Oil ($MRO) reports a Property, Plant & Equipment line that fell 8.2 percent over the same 18-month period. Well, why? Marathon reports all PPE as a single line item, while Devon reports oil & gas PPE and “other PPE” separately. Is that part of the discrepancy? Do other business considerations figure into the story?

We don’t know ourselves, but the data is there for analysts to find deeper issues and arrive at better insights.

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