Devon Energy Corp. (NYSE:DVN)

The period under review demonstrates significant fluctuations in economic profit. Initial years exhibited negative economic profit, followed by a substantial improvement in later years. Net operating profit after taxes (NOPAT) experienced considerable volatility, directly influencing economic profit. Invested capital decreased initially, then increased, reflecting changes in the company’s operational scale and investment strategy. The cost of capital generally increased over the period, placing downward pressure on economic profit.

NOPAT Trend

Net operating profit after taxes began at US$1,250 million in 2018, declining sharply to US$57 million in 2019, and then experiencing a significant loss of US$2,522 million in 2020. A strong recovery occurred in 2021, with NOPAT reaching US$3,160 million, followed by further growth to US$7,447 million in 2022. This indicates a period of initial strength, followed by substantial challenges, and then a robust turnaround.

Cost of Capital Trend

The cost of capital showed an increasing trend throughout the period. Starting at 25.23% in 2018, it rose to 30.67% in 2022. This increase suggests a growing risk profile or changing market conditions impacting the company’s funding costs.

Invested Capital Trend

Invested capital decreased from US$15,392 million in 2018 to US$7,866 million in 2020, potentially reflecting divestitures or reduced investment activity. However, it then increased significantly to US$19,717 million in 2022, indicating renewed investment and expansion. The fluctuations in invested capital correlate with the changes observed in NOPAT.

Economic Profit Analysis

Economic profit was negative for the first three years of the period, reaching a low of US$-4,624 million in 2020. This indicates that the company’s returns were insufficient to cover its cost of capital during these years. A turning point occurred in 2022, with economic profit becoming positive at US$1,399 million, signifying that the company generated returns exceeding its cost of capital. The improvement in economic profit is directly attributable to the substantial increase in NOPAT and the stabilization of invested capital.

Overall, the analysis reveals a period of significant financial volatility followed by a strong recovery. The company’s ability to generate positive economic profit in the most recent year suggests improved financial performance and value creation.

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 improvement culminating in a positive value in the most recent year. This movement correlates with changes in economic profit and invested capital over the period.

Economic Spread Ratio Trend

In 2018, the economic spread ratio was -17.12%. This value deteriorated substantially to -22.67% in 2019, indicating a widening gap between the cost of capital and returns generated from invested capital. The ratio reached its lowest point in 2020 at -58.79%, suggesting a considerable underperformance relative to the cost of capital. A notable improvement occurred in 2021, with the ratio increasing to -10.76%, signaling a reduction in the negative spread. Finally, in 2022, the ratio turned positive, reaching 7.09%, indicating that returns exceeded the cost of capital.

The economic spread ratio’s movement is closely tied to the reported economic profit. The negative ratios from 2018 to 2021 align with periods of negative economic profit, while the positive ratio in 2022 corresponds with positive economic profit. The magnitude of the ratio’s fluctuation appears to be influenced by the substantial changes in invested capital observed during the period.

Relationship to Invested Capital

Invested capital decreased significantly from 2018 to 2020, dropping from US$15,392 million to US$7,866 million. This decrease, coupled with negative economic profit, likely contributed to the particularly low economic spread ratio in 2020. Invested capital then increased in both 2021 and 2022, reaching US$19,717 million. The increase in invested capital, combined with improving economic profit, facilitated the positive economic spread ratio observed in 2022.

The shift from negative to positive economic spread ratio in 2022 suggests a potential improvement in capital allocation efficiency and/or operational performance. However, the volatility observed over the five-year period warrants further investigation to understand the underlying drivers of these fluctuations and assess the sustainability of the recent positive trend.

The economic profit margin exhibited significant fluctuations between 2018 and 2022. Initially negative, the margin demonstrated a substantial improvement culminating in a positive value in the most recent year. This analysis details the observed trends and potential implications.

Economic Profit Margin Trend

In 2018, the economic profit margin stood at -24.54%. This metric deteriorated considerably in 2019, reaching -39.96%, indicating a widening gap between returns and the cost of capital. The most substantial decline occurred in 2020, with the margin plummeting to -95.78%. A partial recovery was observed in 2021, as the margin improved to -14.75%. Finally, 2022 witnessed a marked shift, with the economic profit margin turning positive at 7.30%.

The movement in the economic profit margin closely mirrors the changes in economic profit and revenues. The substantial negative margins in 2019 and 2020 coincided with periods of reduced revenues. The return to positive economic profit in 2022, and consequently a positive margin, suggests improved profitability relative to the cost of capital, likely driven by the significant increase in revenues during that year.

Relationship to Revenues

Revenues decreased from US$10,734 million in 2018 to US$6,220 million in 2019, and further to US$4,828 million in 2020. This decline likely contributed to the increasingly negative economic profit margins observed during those years. Revenues then rebounded significantly, reaching US$12,206 million in 2021 and US$19,169 million in 2022. This revenue growth appears to have been a key factor in the eventual positive economic profit margin achieved in 2022.

The substantial volatility in the economic profit margin highlights the sensitivity of profitability to revenue fluctuations. The positive margin in 2022 represents a significant improvement, but continued monitoring is warranted to assess the sustainability of this performance, particularly in relation to the cost of capital.