A $17.4 Trillion Investment Should Boost This Stock
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Oil prices may be near their lowest levels of the year, but energy investors aren’t too worried. OPEC says $17.4 trillion needs to be spent through 2050 to keep up with demand, up from their estimate last year calling for $14 trillion worth of investments through 2045. The disparity between what is and what will be has quite a few big money managers looking at oil and gas exploration stocks. Devon Energy (DVN) topped their search this month, though not by much, according to our TrackStar data. Our research uncovered a company with a strong balance sheet, a nearly 5% dividend yield, and a recent acquisition set to boost total production. And that’s just the beginning… Devon Energy’s Business With a staggering 707,000 barrels of oil equivalent produced daily, Devon Energy has cemented its position as a powerhouse in U.S. onshore oil and gas production. |
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The company’s operations focus on five core onshore areas: the Delaware Basin, Eagle Ford, Anadarko Basin, Williston Basin, and Powder River Basin. Its portfolio boasts premium acreage in these economically vital regions, with its Delaware Basin assets serving as the crown jewel. Devon’s strategic approach emphasizes capital efficiency, free cash flow generation, and returning value to shareholders through dividends and share repurchases. The company segments its business into the following areas:
Source: Devon Energy Q2 Investor Presentation In the second quarter of 2024, Devon Energy exceeded expectations with oil production reaching a new all-time high of 335,000 barrels per day, 3% above guidance. This performance prompted the company to raise its full-year 2024 production outlook for the second consecutive quarter. Devon recently announced a strategic acquisition in the Williston Basin, set to nearly triple its production in the area. This $5 billion deal, funded through a mix of cash and stock, is expected to close by the end of Q3 2024. It will significantly enhance Devon’s operating scale and inventory in the region. Financials
Source: Stock Analysis As an oil and gas driller, Devon Energy lives and dies by the price of oil and natural gas. Crude prices impact not only its revenues but margins as well. That’s why we see operating margins decline when sales do. Nonetheless, Devon Energy runs a tight ship, maintaining excellent free cash flow and generously giving back to shareholders. Recently, Devon expanded its share repurchase program to $5 billion, representing a 67% increase in authorization. This move and their variable dividend strategy underscore their focus on delivering value to investors. As of right now, the company holds $1.1 billion in cash on its balance sheet against $6.5 billion in debt. With $6.7 billion in operating cash flow, half of which gets spent on CAPEX, there is plenty of room for acquisitions while keeping the dividends well-funded. Valuation
Source: Seeking Alpha Devon Energy trades at a discount relative to many of its peers, including ConocoPhillips (COP), EQT (EQT), and Diamondback Energy (FANG) on a price-to-earnings and price-to-cash flow multiple. Apache (APA) is the only stock in this group cheaper than Devon Energy, but only by a hair. Growth
Source: Seeking Alpha Besides Diamondback Energy, all the companies in our list saw revenue decline last year. Given the recent drop in oil prices, most expect flat to negative sales growth this year. However, we want to highlight Devon Energy’s exceptionally high free cash flow growth over the last three years, which was matched only by ConocoPhillips. Profitability
Source: Seeking Alpha Interestingly, Devon Energy’s margins aren’t the best. But it’s near the top in most categories, including its free cash flow margin. It’s also delivered some of the best assets, equity, and total capital returns.
Our Opinion 10/10 We see a lot of reasons to love Devon Energy’s long-term prospects. The company is well-managed, making smart acquisitions while rewarding shareholders. If a drop in crude prices causes the stock to pull back, we see this as an opportunity to own a high-quality company. |
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Proprietary Data Insights Financial Pros’ Top Oil & Gas Drilling Stock Searches in the Last Month
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