Take Devon Energy (NYSE:DVN
) for example. This Oklahoma-based company is in the volatile exploration and production space with interests in the in-focus shale regions in the middle of the United States.
DVN is much larger (and has remained profitable) when compared to many of its more leveraged or underprepared peers in the space, but it has still seen pain over the past few months. In fact, has seen its share price drop by about 14% in the past six months, though this represents a performance that is well off of the lows for the company’s stock which were seen in December.
Time for Optimism?
Yet while many investors might view the recent positive trading for DVN as a positive, it is best to take a look at some of the fundamentals first. As while DVN might have beaten the S&P 500 over the past month, current and recently updated earnings estimates suggest that DVN’s short-term run might be coming to an end soon.
After all, analysts—those who are arguably the most in the know about the company—haven’t really been believers in the recent DVN rally as they have almost universally been slashing their earnings estimates for DVN lately. For the current and next quarters, we have seen a total of 10 estimates go down in the last seven days compared to zero higher, while for the current and next year time frames, just two estimates have gone higher compared to a total of 13 lower.
And if this analyst agreement wasn’t enough, let’s also consider the magnitude of the estimate revisions. Current quarter estimates have crumbled from 56 cents a share one week ago to just 38 cents a share today. And for the current year, the consensus estimate has fallen from $3.01/share to $2.55/share over the same time frame, in near free fall from the 90 day ago consensus which stood at $5.39/share.
With these figures analysts are now looking for DVN to post an EPS contraction of over 70% for this quarter and close to -50% for the full year too. Things aren’t exactly expected to improve next year either, as that figure looks to be down nearly 30% year-over-year as well.
Thanks to these dramatic declines in expectations, it shouldn’t be too surprising to note that DVN has seen its Zacks Rank fall from a #3 (Hold) down to a #5 (Strong Sell) over the past week. This means that we are looking for underperformance from DVN and suggest that investors consider other choices.
Bottom Line & Other Picks
So while DVN might have been a decent performer lately let’s try to look past this head fake and consider the earnings estimate revision story. Earnings estimates have been crashing in recent days and it isn’t looking good at all for DVN to turn things around in the near term.
We should note that the oil exploration and production segment also has a very low industry rank, bottom 15% overall in fact, so few names have escaped this downturn. However, two companies have been recently upgraded to Zacks Rank #2 (Buy) levels and have seen positive earnings surprises in the last quarter, suggesting investors should look to the duo of Midstates Petroleum (NYSE:MPO) or Sabine Oil & Gas (SOGC) for better exposure in this corner of the market.