Devon prepares for continued low oil prices

The doors were sealed to the public at Devon Energy Center on Wednesday as the oil and natural gas company began laying off 700 people in Oklahoma City and another 300 at field offices throughout the country.

In making the cuts, Devon executives said they sought to balance cutting costs and keeping the company in position to grow again when prices recover.

“We have the ability to flex our capital down, and we have the ability to flex it back up very quickly,” CEO Dave Hager said on a conference call with analysts Wednesday. “Despite the employee reduction, it is very important to maintain the organizational capacity to flex our program back up should we see encouragement in prices. We just don’t think it makes a lot of sense to accelerate production in a $30 price environment.”

Hager said the company is taking aggressive steps to improve its financial picture in light of low oil prices. Devon on Tuesday announced a 75 percent cut in its drilling program, a 75 percent cut in its dividend payments and a 20 percent cut in its workforce.

“As we look to 2016, our top priority is to protect the balance sheet by balancing spending with available cashflow,” Hager said. “We see no reason to accelerate production growth into these weak markets.”

Despite rising oil prices, Devon shares slipped 93 cents, or 4.4 percent, Wednesday to $20.33, down 71 percent over the past year. The stock price fell another 68 cents in aftermarket trading when the company said it will sell 55 million shares of common stock in a secondary equity offering.

At Wednesday’s closing price, the equity offering would raise $1.1 billion, which Devon said it would use for general corporate purposes, including improving its liquidity position, reducing debt and funding its capital program.

Devon also said it plans to raise money by selling noncore assets

for $2 billion to $3 billion. Despite low oil prices, Devon executives expressed confidence they can sell the assets for strong returns.

“These are high-quality assets,” Hager said. “We’re moving very quickly to get ahead of what we think may be further asset sales by other peers. We are on the timeline to open data rooms and move aggressively in the market.”

While Wall Street punished Devon shares on Wednesday, Tulsa money manager Jake Dollarhide said the company is taking essential steps.

“The responsible and realistic energy companies are facing a core reality that oil may be in the $30 to $40 range for some time to come,” said Dollarhide, president of Longbow Asset Management Co. “It’s all about liquidity and cash and hunkering down for what could be a long wait.”

Dollarhide said he supports Devon’s equity offering even though such moves typically dilute the stock and lead to lower share prices.

“This comes down to a need for access to liquidity to help them survive this difficult time,” Dollarhide said.

“The market reaction is proof this is not viewed positively, but an energy company in this day and age doesn’t have a lot of choices. There are a lot of companies trading for less than $5 that would love to have this option but do not,” he said.

Devon generally is considered to be one of the state’s strongest and financially viable oil and natural gas companies. Such aggressive actions at Devon could signal more challenges for the state and local economies over the next several months, Dollarhide said.

“This is further proof that we’re in a dire period when it comes to the energy industry for our state and for Oklahoma City and Tulsa,” he said. “There are a lot of people buckling down. There are a lot of families putting off vacations and home purchases. They’re changing their lifestyles. They’re being a lot more conservative in their outlook, which will affect the economy.”