Devon Energy (NYSE:DVN) acquired a strong position in the Eagle Ford shale. It now has acreage in DeWitt and Lavaca Counties, which are the best parts of the region. Having 82,000 acres in these highly productive region gives Devon a competitive advantage. The company has achieved a best-in-class 30-day Initial Production, or IP, average of 1,055 barrels of oil equivalent per day, or boed, in the Eagle Ford. Devon's 30-day IP average is much higher than the industry average of 608 boed. This is primarily because more than 90% of the company's wells are delivering an IP above the industry average.
Out of the 82,000 net acres in the Eagle Ford, Devon has 50,000 net acres in DeWitt County. This region is essentially de-risked, with the company having at least one well drilled in each drilling unit. This falls right in line with Devon's strategy of concentrating on development activities rather than exploration.
Devon's Eagle Ford deal is the largest acquisition of exploration and production assets announced in 2013. Through its acquired position in the Eagle Ford, Devon has shifted its focus towards improving its oil production. Oil production will form over 31% of the overall production mix at the end of this year, improving from a 25% contribution earlier. The Eagle Ford assets also present a solid revenue opportunity for Devon.
Assuming a WTI crude price of $95 per barrel on average, and an average Henry Hub gas price of $3.8 per thousand cubic feet, the expected revenue from Eagle Ford is $144.3 million, calculated for the balance 42 days of 2013 following the acquisition. Devon has a target to increase production in the Eagle Ford by 40% next year and at a CAGR of 25% through 2017, which means it can generate a free cash flow of over $2.5 billion through 2017 from its Eagle Ford production.
Lower short interest rates
One factor worth considering when picking up stocks is the confidence of the investors in the stock. This can be ascertained by looking at the short interest data released by Nasdaq. The number of Devon shares short (sold short) for the 30-day period ending November 15, 2013 dropped to 14,770,523, a reduction of almost 8% over the former figure of 16,050,451 in the previous 30-day period. Days to cover is another useful metric that considers the average daily volume of shares traded in combination with the total number of shares short. Average daily volume of shares traded in the 30-day period ending November 15, 2013 increased by more than 30% over the previous 30-day period. The days to cover for Devon declined to 2.04 from 2.92 in the two periods discussed above, a solid reduction of 30%.
Another solid stock to consider from the above perspective is Chesapeake Energy (NYSE:CHK). This stock has seen a 17% reduction in short interest in the 30-day period ending November 15, 2013 over the previous 30-day period. The corresponding reduction in days to cover is 47%, dropping from 9.5 to 5.04. Chesapeake has benefited from the appointment of new CEO Doug Lawler. His asset sales and employee-reduction strategies have allowed the company to cut costs and concentrate on its core business areas. Investors have shown faith in Lawler's strategy of cost reduction, which bodes well for Chesapeake.
EOG Resources (NYSE:EOG) is yet another stock investors don't want to miss when considering the short interest data. Short interest for the 30-day period ending November 15, 2013 for EOG reduced 27.5% over the previous 30-day period. Days to cover over the corresponding period declined by a robust 49% making the stock look attractive. Investors might be skeptical about investing in a stock that is trading at a P/E multiple hovering around 40, but ignoring this stock because of a high P/E multiple would be a mistake. Instead, consider this stock's discretionary cash flow, which has increased 29% in the nine months ending September 2013. EOG is trading at a multiple of just 6.25 times its discretionary cash flow over the trailing 12 months. This makes the stock appear a lot cheaper than it appears at first instance.
Devon is expected to benefit from its move into the Eagle Ford shale. Having acreage in a highly productive location in the shale can help its long-term production. The company's capital spending program in the region is indicative of its motive to stay very active in the region over the next year. Eagle Ford is forecasted to experience increasing production over the next several years, which is beneficial for Devon. A reduction in short interest and days to cover also indicates investors' increasing confidence in the stock's price growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.