Devon Energy Corp. (NYSE:DVN)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) experienced substantial volatility, beginning at US$1,250 million in 2018, declining sharply to US$57 million in 2019, and then registering a substantial loss of US$2,522 million in 2020. A recovery was observed in 2021 with NOPAT reaching US$3,160 million, followed by a further increase to US$7,447 million in 2022.

The cost of capital exhibited an increasing trend throughout the period. Starting at 21.55% in 2018, it rose to 26.05% by 2022, indicating a progressively higher required rate of return for investors.

Invested capital decreased from US$15,392 million in 2018 to US$7,866 million in 2020, before increasing to US$16,727 million in 2021 and US$19,717 million in 2022. This suggests potential capital expenditure adjustments or asset sales during the earlier part of the period, followed by reinvestment.

Economic Profit Trend

Economic profit was negative for the first four years of the period. A loss of US$2,068 million was recorded in 2018, which worsened to US$2,124 million in 2019 and reached its lowest point of US$4,316 million in 2020. The loss narrowed to US$1,056 million in 2021, and finally turned positive in 2022, reaching US$2,311 million. This indicates that the company only began generating returns exceeding its cost of capital in the most recent year.

Relationship between NOPAT and Economic Profit

The fluctuations in economic profit closely mirror those of NOPAT. The substantial losses in economic profit in 2019 and 2020 directly correlate with the significant declines in NOPAT during those years. The positive economic profit in 2022 is a direct result of the substantial increase in NOPAT.

Impact of Cost of Capital

The rising cost of capital presented a challenge to achieving positive economic profit. Even as NOPAT improved in 2021 and 2022, the increasing cost of capital partially offset these gains. The positive economic profit in 2022 was achieved despite a higher cost of capital than in previous years, suggesting a significant improvement in operational efficiency and profitability.

Overall, the period was characterized by volatility, with a clear shift towards improved economic performance in the final year. The company’s ability to generate positive economic profit in 2022, despite a rising cost of capital, represents a positive development.

The financial performance over the observed periods demonstrates significant volatility in net earnings attributable to Devon. Starting with a robust net earnings figure of $3,064 million at the end of 2018, the company experienced a notable decline into negative territory in 2019 and 2020, with losses reaching $355 million and $2,680 million, respectively. This indicates a period of financial distress or unfavorable operational conditions during these years. However, there is a strong recovery commencing in 2021, with net earnings rebounding to $2,813 million, and further strengthening in 2022 to $6,015 million, which surpasses the pre-decline level.

Net operating profit after taxes (NOPAT) follows a similar pattern, confirming trends in operational efficiency and profitability. In 2018, NOPAT was $1,250 million, followed by a sharp decline in 2019 to $57 million, and a substantial loss of $2,522 million in 2020. The turnaround is evident in 2021, with NOPAT increasing to $3,160 million and continuing growth in 2022 to $7,447 million, indicating improved operational management and a return to profitability with even greater margins than initially observed.

Trend Summary

The period from 2018 to 2020 is characterized by a significant downturn in both net earnings and NOPAT, reflecting operational or market challenges.

The years 2021 and 2022 mark a strong recovery, culminating in the highest profitability levels within the dataset.

The recovery phase shows not only a restoration to prior earnings levels but also an enhancement, suggesting enhanced operational performance and/or favorable market conditions.

The analysis of the data over the period from 2018 to 2022 reveals notable volatility in both income tax expense (benefit) and cash operating taxes.

Income Tax Expense (Benefit)

There is a significant fluctuation observed across the years. Starting at an expense of $156 million in 2018, the figure turned to a tax benefit of $30 million in 2019, and this benefit further increased substantially to $547 million in 2020. However, in 2021, the amount reverted to a tax expense of $65 million, followed by a sharp rise to $1738 million in 2022. The pattern indicates a high degree of variability with a strong upward spike in the latest year, suggesting considerable changes in taxable income, tax planning, or adjustments in tax legislation or assessments.

Cash Operating Taxes

Cash operating taxes also exhibit considerable variability. Beginning with a negative value of $4 million in 2018, which can indicate a tax refund or credit, the amount increased to $43 million in 2019. Then, a substantial negative amount of $167 million is reported in 2020, again implying a possible tax benefit or refund. The figure shifted to a positive $97 million in 2021 and rose sharply to $629 million in 2022. This variability and the marked increase in 2022 align with the trend in income tax expense, pointing towards a considerable increase in tax payments in the latest year after periods of tax benefits in prior years.

Overall, both measures demonstrate considerable instability, with the most notable changes occurring in 2020, when large tax benefits were recorded, and in 2022, when there was a substantial increase in tax expenses and cash taxes paid. These fluctuations may reflect changing profitability, tax strategies, or external factors affecting taxation.

Total Reported Debt & Leases

The total reported debt and leases decreased significantly from 6,285 million USD at the end of 2018 to 4,555 million USD in 2019, remaining relatively stable into 2020 at 4,553 million USD. However, in 2021, this figure rose markedly to 6,760 million USD and then showed a slight decrease to 6,718 million USD in 2022. This indicates a period of debt reduction followed by an increase, suggesting a possible strategic increase in leverage or financing activities starting in 2021.

Stockholders’ Equity Attributable to Devon

Stockholders’ equity attributable to the company exhibited a downward trend from 9,186 million USD at the end of 2018 to a low of 2,885 million USD in 2020. This was followed by a strong recovery in the subsequent years, with equity rising to 9,262 million USD in 2021 and further increasing to 11,167 million USD by the end of 2022. This pattern reflects significant fluctuations in the company’s net worth over the period, with a notable rebound post-2020.

Invested Capital

Invested capital decreased from 15,392 million USD at the end of 2018 down to 7,866 million USD in 2020, mirroring the declines seen in debt and equity during this period. From 2021 onwards, invested capital experienced substantial growth, rising sharply to 16,727 million USD and then continuing upward to 19,717 million USD in 2022. This trend suggests an expansion in the company’s asset base and funding sources during the last two years examined.

The economic spread ratio exhibited significant fluctuations between 2018 and 2022. Initially negative, the ratio demonstrated a substantial decline before recovering to positive territory. This movement correlates with changes in economic profit and invested capital over the same period.

Economic Spread Ratio Trend

In 2018, the economic spread ratio was -13.43%. This value deteriorated considerably in 2019, reaching -19.37%, indicating a widening gap between the cost of capital and returns generated. The most substantial decline occurred in 2020, with the ratio plummeting to -54.86%. A partial recovery was observed in 2021, with the ratio improving to -6.32%. Finally, 2022 saw a marked positive shift, as the economic spread ratio rose to 11.72%, signifying that returns exceeded the cost of capital.

Relationship to Economic Profit

The economic spread ratio’s negative values from 2018 through 2021 align with consistently negative economic profit during those years. The most negative economic spread ratio in 2020 corresponds with the largest negative economic profit reported for the period. The transition to positive economic profit in 2022 directly drove the economic spread ratio into positive territory.

Relationship to Invested Capital

Invested capital decreased from 2018 to 2020, then increased significantly in 2021 and 2022. While decreasing invested capital might suggest an opportunity to improve ratios, the consistently negative economic profit during those years offset this potential benefit. The substantial increase in invested capital in 2021 and 2022, coupled with a return to positive economic profit, was necessary to achieve the positive economic spread ratio observed in 2022.

The observed trend suggests a period of underperformance followed by a substantial improvement in value creation. The positive economic spread ratio in 2022 indicates a more favorable relationship between returns and the cost of capital, but continued monitoring is warranted to assess the sustainability of this improvement.

The economic profit margin exhibited significant fluctuations between 2018 and 2022. Initially negative, the margin demonstrated a substantial decline before recovering to positive territory. A detailed examination of the trends reveals key insights into the company’s profitability relative to its cost of capital.

Economic Profit Margin Trend

In 2018, the economic profit margin stood at -19.27%. This indicates that the company’s economic profit was 19.27% below the required return on capital employed. The margin deteriorated considerably in 2019, reaching -34.15%, suggesting a worsening of profitability relative to its cost of capital. This negative trend continued into 2020, with the economic profit margin plummeting to -89.39%, representing a substantial shortfall in generating returns exceeding the cost of capital. A notable improvement occurred in 2021, as the margin moved to -8.66%, indicating a reduction in the gap between economic profit and the cost of capital. Finally, in 2022, the economic profit margin turned positive, reaching 12.05%, signifying that the company generated economic profit exceeding its cost of capital.

The movement in the economic profit margin closely mirrors the changes in economic profit and revenues. The substantial decline in revenues between 2018 and 2020 likely contributed to the increasingly negative economic profit margins observed during that period. The recovery in revenues in 2021 and particularly in 2022, coupled with a positive shift in economic profit, drove the economic profit margin into positive territory. The significant swing from a margin of -89.39% in 2020 to 12.05% in 2022 suggests a substantial improvement in the company’s ability to generate returns above its cost of capital, coinciding with the revenue increase.

Relationship to Revenues

Revenues decreased from US$10,734 million in 2018 to US$4,828 million in 2020, coinciding with the most negative economic profit margin values. Revenues then increased significantly to US$19,169 million in 2022, concurrent with the positive economic profit margin. This correlation suggests a strong link between revenue generation and the company’s ability to achieve economic profitability.

The observed trends indicate a period of financial challenge followed by a substantial recovery. The company’s performance in 2022 demonstrates a significant improvement in its ability to generate economic profit, exceeding the cost of capital employed.