Stock Analysis

What Investors Should Know About Devon Energy Corporation's (NYSE:DVN) Financial Strength

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There are a number of reasons that attract investors towards large-cap companies such as Devon Energy Corporation (NYSE:DVN), with a market cap of US$16.68B. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, the health of the financials determines whether the company continues to succeed. I will provide an overview of Devon Energy’s financial liquidity and leverage to give you an idea of Devon Energy’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into DVN here. See our latest analysis for Devon Energy

Does DVN produce enough cash relative to debt?

DVN has sustained its debt level by about US$10.47B over the last 12 months made up of current and long term debt. At this constant level of debt, DVN's cash and short-term investments stands at US$2.67B , ready to deploy into the business. Moreover, DVN has produced cash from operations of US$2.91B during the same period of time, resulting in an operating cash to total debt ratio of 27.78%, signalling that DVN’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In DVN’s case, it is able to generate 0.28x cash from its debt capital.

Can DVN pay its short-term liabilities?

With current liabilities at US$3.32B, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.45x. For Oil and Gas companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too capital in low return investments.

NYSE:DVN Historical Debt Mar 16th 18
NYSE:DVN Historical Debt Mar 16th 18

Does DVN face the risk of succumbing to its debt-load?

DVN is a relatively highly levered company with a debt-to-equity of 74.23%. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can put the sustainability of DVN’s debt levels to the test by looking at how well interest payments are covered by earnings. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In DVN's case, the ratio of 1.96x suggests that interest is not strongly covered. Given the sheer size of Devon Energy, it's unlikely to default on interest payments and enter bankruptcy. However, compared to an amply profitable large-cap peer, debtors may see more risk in lending to DVN.

Next Steps:

DVN’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around DVN's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for DVN's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Devon Energy to get a more holistic view of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for DVN’s future growth? Take a look at our free research report of analyst consensus for DVN’s outlook.
  2. Valuation: What is DVN worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether DVN is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

Valuation is complex, but we're helping make it simple.

Find out whether Devon Energy is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.