Devon Is Positioned to Prosper from Natural Gas Rebound

Buy-recommended Devon Energy (DVN) offers unlevered appreciation potential of 71% to a McDep Ratio of 1.0 and levered appreciation potential of 95% to Net Present Value (NPV) of $116 a share. During the first quarter, according to results released today, the company generated cash from oil and gas production of about $18 a barrel of oil equivalent as the difference between price of about $24 and cash operating costs of about $6.

Though unlevered cash flow (Ebitda) was less than our expectations from three months ago, operating costs are among the lowest. We project gradual increases in Ebitda in the second half of 2009. By latest disclosures, oil and gas reserves, weighted by development, are concentrated 69% in natural gas and 31% in oil by heating value.

Our valuation capitalizes cash flow at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P) for natural gas and oil. Pointing to expected oil price recovery, futures prices for the next six years averaged near $71 a barrel recently. Performing well, considering the current state of natural gas, Devon is positioned to prosper as the clean fuel regains market values.

Originally published on May 6, 2009.

Comments

[Shale Gas:]

Devon is an excellent company. It was a first mover in the Barnett Shale and is also active in the Gulf of Mexico and has a project in the oil sands in Canada.

Jun 09 08:34 AM

[isaac the t...:]

I think the reason that no one responds to your postings even though you write about a very important sector, is that all you do if give a series of numbers without trend commentary, context, or other fundamnetal analysis. You would garner tremendously more interest by augmenting your postings. For example, in this article- why do expect NG to rebound, and what is it about Devons holdings and operations that make them better than EOG?
Anyway, thanks for your efforts and info.

Jun 09 10:37 AM

[Larry House:]

Good call.

Jun 09 05:40 PM

[Mad Hedge F...:]

they've got to get through this summer first. Every evening, after the cleaning staff has swept up the discarded trade tickets from the floor, the networks have swapped relentlessly opinionated commentators for game shows, and all but the most ambitious traders have decamped for the bars across the street, I sit down and go over my portfolio, asking myself a few key questions. Have I gone completely insane? What have I missed? Are these the positions of someone who has gone completely barking Mad (oops)? Just as I was going through this exercise last night, a long time friend from the energy industry, who used to put me up in his Dallas mansion when I was wildcatting for natural gas in the Barnet Shale a decade ago, called me up and told me I was out of my tree putting people into NG at $3.60. Huge discoveries, such as the Hainesville shale in Alabama, have made available enough NG to last the US another 50 years. The new generation of fracting technology, while great for taping into marginal, low grade fields, is much more difficult to turn off when prices are low without causing permanent damage. And then there is the looming threat of large scale LNG imports from abroad. The big gas companies will be forced to dump whatever they have on the market at any price, possibly taking prices this summer down to $2, or even $1. This, after all is the mother of all overshoot contracts. Of course, one could argue that these risks are what already took it down to $3.20, and that industry demand will happily soak up the excess supply. Did I mention that the hurricane season started yesterday? Only Mr. Market knows for sure, and he ain’t talking. In the past month, my calls have enabled traders to catch a 50% move in NG, followed by a 20% move (www.madhedgefundtrader... ). No one will think less of you if you want to cash out here at $4.30 and stay on the sidelines until a more definitive bottom is put in. As they love to tell you in flight school, there are old pilots, and there are bold pilots, but there are no old, bold pilots.

Jun 09 07:02 PM