Optimizing Shareholder Value – A Lesson from Devon Energy’s Management

In November of last year, Devon (symbol: DVN) completed its $3.5B share repurchase program announced in May of 2010.  Under this program the company repurchased 49.2MM shares, for an average price of $71/share, reducing the share count by 10%!  During the same period, management sold non-core acreage raising the cash to fund the repurchases, pay down debt, and acquire onshore core acreage.  This strategy realizes full asset value for non-core properties, improves Devon’s balance sheet, reduces shares outstanding, and allows management to focus on the highest IRR projects.  As shareholders we love this.  A little bit of arithmetic shows why.

As seen in the table below, the company sells 7% of its proved reserves for $10B.  The after tax proceeds of $8B are used to: reduce shares outstanding by 10% for $3.5B; reduce debt by $1.8B; acquire new core acreage positions for $1.2B; add $500M of cash to the balance sheet.  Furthermore, Devon’s management has excelled at more than optimizing the capital structure as they have demonstrated continued strong operating results increasing proved reserves per share by 17% notwithstanding the divestitures.

Pre-plan (YE2009) Post-plan (YE 2011)
Shares Outstanding 447MM 404MM
Proved Core Reserves 2641MMBoe 3005 MMBoe
Proved Divested Reserves 200 MMBoe 0 MMBoe
Total Proved Reserves 2841 MMBoe 3005 MMBoe
Net Debt $6.6B $2.7B
Average repurchase price $71 $71
Proved reserves/share 6.4Boe/share 7.4Boe/share
Net Debt/share $14.76 $6.68
Cash Margin per Boe* $19.37 $19.37
Value/share debt adjusted $109.21 $136.66

Using a simplistic analysis for debt adjusted value per share based on proved reserves illustrates how Devon’s management created $27/share of value for stock holders over the past two years.  While there are other ways to value shares, this way does serve as a useful evaluation of Devon’s value enhancing capital redeployment and highlights the virtuous cycle of share repurchases for undervalued companies.

Data is taken from 10-Ks, earnings releases, and company presentations

*Based on 2011 results as provided in the 2/18/12 company presentation

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