Devon stock sale surprises Street; CEO had downplayed prospect
HOUSTON • It was a head fake that left Wall Street scratching its head.
Dave Hager, Devon Energy Corp.’ s chief executive, on Wednesday downplayed the need for a stock offering, telling analysts the oil producer would prefer to sell assets and cut its dividend to protect its balance sheet.
But a few hours l ater Devon issued a press release announcing it would offer 69 million shares, its first such sale since 1999 not connected to an acquisition and one that will boost its shares outstanding by more than 18 per cent.
The company’s shares fell as much as five per cent on a day when those of many of its peers tumbled as malaise grips the oil sector, which is suffering its worst price crash in years. The shares extended their fall on Thursday, closing down 3.1 per cent at US$19.70.
Analysts criticized the Oklahoma City- based company in investor notes, with one parroting a villain from a popular comic book series by saying: “Riddle Me This, Batman.”
Devon told Reuters on Thursday that it did not make the final decision to launch the equity offering until late Wednesday afternoon.
Hager had downplayed the need for an offering on a Wednesday morning conference call with investors. The press release announcing the offering was issued at 3: 08 p.m. local time Wednesday.
“The decision to issue equity was taken very seri ously a nd with much t hought and discussion among the management team and Devon board,” the company said in a statement to Reuters. “Devon believes this is a prudent additional measure to protect against the possibility of lower commodity prices for a prolonged period.”
Devon has been trying to raise cash by selling acreage and a stake in a Canadian pipeline, deals it had hoped at one time would net $2 billion to $3 billion. As oil prices have plunged in the past year, doubts have grown that Devon can obtain that much.
Hager and other executives said on the Wednesday conference call they still believe the deals will get done in that price range.
“This equity offering ap- pears to be a ‘ batten down the hatches’ defensive move by Devon that is aimed at combating a ‘ lower for longer’ pricing scenario,” said Capital One analyst Phillips Johnston.
Hager stressed that the company’s balance sheet — with more than US$ 1 billion in cash and US$ 2.4 billion undrawn on a revolving line of credit — was strong enough to retain an investment-grade credit rating.
Devon has maintained its investment grade rating with Standard & Poor’s and Fitch. Hager downplayed any need to launch a stock offering just to appease Moody’s, which is reviewing the company now and could potentially cut Devon’s rating, a step that might make it harder to raise cash.
“We can’t just chase investment grade rating when it’s uncertain with Moody’s what the criteria is that they’re going to use,” Hager said. “We’re going to focus less on that and make sure that we make the right decisions for the business overall, for our shareholders and for our bondholders.”
Analysts said other companies are in the same predicament with Moody’s, which declined to comment on Thursday.
On Tuesday, with the release of its quarterly results, Devon said it would cut its dividend, lay off 20 per cent of its staff and slash capital spending by 75 per cent.
“If commodity prices remain low, Devon has significant balance sheet strength to withstand an extended downturn,” Hager said on the Wednesday call.
Hager responded to a question from an analyst about any additional stock offerings by saying: “We’re focused on the asset sales, the dividend reduction.”
Although he did not rule out a stock sale, analysts were nonplussed by the announcement. “This is a surprise,” Tudor, Pickering, Holt & Co. said in a Thursday note, noting that Hager had “shrugged off the need to issue equity when asked multiple times.”