Opinions
Eric Nuttall
Devon Energy Corp
DVN-N
DON'T BUY
Mar 11, 2025
Stock price when the opinion was issued
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A pipeline from the Permian to the Gulf of Mexico will come online, the Matterhorn, which will increase the flow of oil as well as natural gas, which has been trading at a negative price this year. So, the producers will be much more profitable. Two more pipelines are coming and will support the oil price and their companies. She likes Devon, paying a 5% yield and will benefit from the Matterhorn.
DVN is one of the lowest cost natural gas producers in the US. They recently invested in a 2 bcfd pipeline to move their production from the under-piped Permian region to the Gulf Coast. They have been prudently deploying some cash reserves to reduce debt and buy back shares. It trades at 6x earnings, 1.4x book, and supports a 26% ROE. Its healthy dividend is backed by a payout ratio under 40% of cash flow. We recommend setting a stop-loss at $25, looking to achieve $40 -- upside potential of 28%. Yield 4.7%
(Analysts’ price target is $50.12)DVN is cheap, and has a decent and growing dividend. The balance sheet is reasonable. Its last quarter was decent. The stock decline seems more connected to the sector and commodity prices than anything company-specific. Devon's 1Q capital spending may rise sequentially, its total daily production could still fall -- driven by the timing of drilling and completion activity -- which should hurt free cash flow. Still, synergies from the Grayson Mill deal might have helped reduce capex in 1Q. Devon's unhedged realized oil price may rise slightly, given crude benchmarks shifted modestly. The company should be relatively exposed to this, with over a quarter of its 1Q daily oil production hedged against WTI volatility. Overall, Devon’s free cash flow may have increased in 1Q. The company’s scale and manageable leverage should give it a buffer if crude benchmarks remain relatively lower in the near term due to the impact of US tariffs and subsequent trade spats. We would be OK holding today, but it will require belief in the sector and some investor patience.
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They underperformed a lot last year, but have been righting the ship after disappointing quarters. Has deep value, trading at 4x, a 15% free cash flow yield, though worried about inventory depth in the Permian. He must prefers Canadian oil sand companies (solid balance sheet, long inventories, execution, share buybacks).