Opinions
Phil Taller
Devon Energy Corp
DVN-N
DON'T BUY
Jul 06, 2005
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)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).