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 25.42% in 2018, it rose to 30.91% by 2022, with intermediate values of 23.35% in 2019, 26.92% in 2020, and 29.88% in 2021.

Invested capital decreased from US$15,392 million in 2018 to US$10,964 million in 2019, and continued to decline to US$7,866 million in 2020. A substantial increase was then noted in 2021, reaching US$16,727 million, followed by a further rise to US$19,717 million in 2022.

Economic Profit Trend

Economic profit was negative for the first four years of the period. A loss of US$2,663 million was recorded in 2018, followed by losses of US$2,504 million in 2019, US$4,640 million in 2020, and US$1,838 million in 2021. A significant shift occurred in 2022, with economic profit turning positive at US$1,353 million. This positive result coincides with the highest NOPAT value and a stabilization in invested capital.

The negative economic profit figures from 2018 to 2021 suggest that the company’s returns on invested capital were below its cost of capital during those years. The substantial improvement in 2022 indicates that the company generated returns exceeding its cost of capital, signifying value creation. The interplay between NOPAT, cost of capital, and invested capital is critical to understanding these fluctuations. The increasing cost of capital, coupled with the initial decline in NOPAT and invested capital, contributed to the extended period of negative economic profit. The subsequent increases in NOPAT and invested capital, alongside a moderated increase in the cost of capital, ultimately drove the positive economic profit in the final year.

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 -17.30%. This figure deteriorated considerably to -22.84% 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 -58.98%, suggesting a substantial underperformance relative to the cost of capital. A notable improvement occurred in 2021, with the ratio increasing to -10.99%, signaling a reduction in the negative spread. Finally, in 2022, the ratio turned positive, reaching 6.86%, which indicates that returns exceeded the cost of capital for the first time within the observed timeframe.

The economic spread ratio’s movement is closely tied to the trend in economic profit. The negative ratios from 2018 to 2021 align with the consistently negative economic profit reported during those years. The shift to a positive economic spread ratio in 2022 directly corresponds with the positive economic profit achieved in that year.

Invested Capital Relationship

Invested capital decreased from US$15,392 million in 2018 to US$7,866 million in 2020. This reduction in capital employed likely contributed to the worsening economic spread ratio during those years, as the same level of economic loss was spread across a smaller capital base. However, invested capital then increased significantly to US$19,717 million by 2022. While the increase in invested capital could dilute returns, the positive economic spread ratio in 2022 demonstrates that the increased capital was deployed effectively, generating returns above the cost of capital.

The substantial volatility in the economic spread ratio suggests a period of significant operational and financial adjustments. The eventual positive ratio in 2022 indicates a successful turnaround in value creation, with the company generating returns that exceed its cost of capital.

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 -24.81%. This indicates that the company’s economic profit was 24.81% below the required return on capital employed. The margin deteriorated considerably in 2019, reaching -40.25%, suggesting a worsening of profitability relative to the cost of capital. 2020 witnessed a dramatic decline, with the economic profit margin plummeting to -96.10%, representing a substantial shortfall in generating returns exceeding the cost of capital. A partial recovery occurred in 2021, as the margin improved to -15.06%, indicating a lessening of the negative gap. Finally, 2022 saw a significant shift, with the economic profit margin turning positive at 7.06%, signifying that the company generated economic profit exceeding its cost of capital.

The movement in economic profit margin closely mirrors the changes in economic profit and revenues. The substantial negative margins in 2019 and 2020 coincided with lower revenue figures. The positive economic profit margin in 2022 is directly linked to both a substantial increase in revenues and a positive economic profit.

Revenue Correlation

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 appears to have 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 is associated with the improvement in, and eventual positive turn of, the economic profit margin.

The progression from substantial negative economic profit margins to a positive margin in 2022 suggests a turnaround in the company’s ability to generate returns that exceed its cost of capital. The correlation between revenue and economic profit margin highlights the importance of revenue growth in driving economic profitability.