Yahoo Finance Does Devon Energy Corporation’s (NYSE:DVN) Debt Level Pose A Problem?
The size of Devon Energy Corporation (NYSE:DVN), a US$16.4b large-cap, often attracts investors seeking a reliable investment in the stock market. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the key to extending previous success is in the health of the company’s financials. This article will examine Devon Energy’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into DVN here.
Check out our latest analysis for Devon Energy
How much cash does DVN generate through its operations?
Over the past year, DVN has reduced its debt from US$10.6b to US$6.1b – this includes both the current and long-term debt. With this reduction in debt, DVN currently has US$1.5b remaining in cash and short-term investments for investing into the business. Additionally, DVN has generated US$2.7b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 45%, signalling that DVN’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In DVN’s case, it is able to generate 0.45x cash from its debt capital.
Can DVN meet its short-term obligations with the cash in hand?
Looking at DVN’s most recent US$8.4b liabilities, the company has been able to meet these obligations given the level of current assets of US$13.8b, with a current ratio of 1.65x. For Oil and Gas companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can DVN service its debt comfortably?
With debt reaching 47% of equity, DVN may be thought of as relatively highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. However, since DVN is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although DVN’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. 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:
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.
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.
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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
