Analyzing third quarter results released today, we reaffirm estimated Net Present Value (NPV) of $98 a share for buy-recommended Devon Energy (DVN). On that basis, unlevered appreciation potential is 35% to a McDep Ratio of 1.0 where stock price would equal NPV. Unlevered cash flow (Ebitda) met expectations in the latest quarter. Volume was lower as a result of conscious choice at a time of low natural gas price. Nonetheless, the quarter just completed looks like the start of a rising trend.
Natural gas emphasis dominates the current property mix, driving 61% of NPV in our valuation, which capitalizes cash flow at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P) for natural gas and oil. On the quarterly call, management said it expects volume in the Barnett Shale field, where Devon is the largest producer, to advance again in the winter months. Devon also recently disclosed a big well testing at 30 million cubic feet daily (mmcfd) that “blows the lid off” of secrecy in a new area of the Haynesville shale, according to competitor XTO Energy (XTO).
Management was further willing to talk of high expectations in the Cana shale play now that all the land has been tied up by Devon and Cimarex Energy (XEC). Finally, the industry backdrop is helped by the positive trend indicated by six-year oil trading above the 40-week average
Originally published on November 4, 2009.