- Devon has smoothly transformed itself from a natural gas producer to a liquid-based producer.
- The recent sale of Canadian assets is a strategic step aimed at focusing on liquid production growth, while the proceeds will be used to reduce debt.
- The company has a solid portfolio of assets in the Eagle Ford, Permian Basin, Alberta oil sands, and Mississippi Line.
- With a strong asset portfolio, positive developments, and comparatively low valuation, Devon is an attractive investment.
Devon Energy (NYSE:DVN) recently announced that it has completed the sale of its conventional assets in Canada to Canadian Natural Resources for an amount of CAD$ 3.125 billion. Following the sale, the company's Canadian business will be comprised of thermal heavy oil, as well as Lloydminster and Horn River assets. The company plans to repatriate these proceeds to the US that will be utilized in the repayment of debt incurred to finance its Eagle Ford acquisition. This is not the first time that the company has taken such steps towards sharpen its focus. In 2010, Devon sold its Gulf of Mexico assets to British Petroleum (NYSE:BP) and Apache (NYSE:APA) for a total amount of $8.3 billion.
In the wake of selling these assets, Moody's recently revised Devon's debt ratings with a stable outlook. The stable rating is a result of considerable progress the company has made in its asset divestiture program. It also reflects the company's commitment to reduce and lower debt balances. With Devon's commitment to continue selling non-core assets for debt reduction in 2014, the company seems to be a worthy investment.
Research, brokerage, and portfolio management companies also responded to the development by raising the price targets. In addition to BMO Capital, Argus also raised the price target on Devon to $80 from $70, reflecting an upside potential of approximately 20 percent from the current market value. The firm believes that the company has recently initiated certain positive steps that are earnings-assertive, but have not been fully reflected in the stock price. Moreover, Devon is among the companies that are poised to deliver strong production growth.
Investment Thesis: Long-Term Production Growth
Devon Energy has proved reserves of 2.6 billion BOE, without considering the reserves of non-core assets that have been identified for sale. The company expects its 2014 net production to be 580-620 million barrels of oil equivalent, and 55% of this is expected to be in oil and liquids. The company has slowly and consistently transformed itself from a predominantly natural gas company to a crude oil and liquids production company. It announced the acquisition of Eagle Ford assets from GeoSouthern Energy back in November for $6 billion. Accordingly, Devon can now have 82000 net leasehold acres in Dewitt and Lavaca counties in Texas that were producing 53000 barrels per day.
The company targets 70-80 MBOED of net production in 2014, with 76% of the production being liquid-based. It is worth mentioning here that production estimates do not represent full-year production. However, in the long term, the shale is positioned to grow production with a CAGR of more than 30% through 2017.
In addition to Eagle Ford, Devon's core assets consist of the Permian Basin, Eagle Ford shale, Alberta oil sands, and other onshore assets like Mississippi Lime. During 4Q 2013, Permian Basin delivered approximately 86 MBOED, 60% of which was liquid. Devon has allocated $1.5 billion of capital budget to be spent in the Delaware Basin and Mid-land Wolfcamp shale, and is determined to drill 350 wells in 2014. This will result in 20% oil growth in 2014. In total, these assets are expected to grow the company's oil production by 330,000 barrels per day by 2016.
Devon Energy has been aggressively pursuing the strategy to liquidate its international assets and use the proceeds to focus more on liquid-rich assets. The recent sale of Canadian assets is just the continuation of the strategy, the proceeds of which will be used to repay the debt incurred for the acquisition of acreage in the Eagle Ford shale.
The company is inexpensively priced compared to its competitors, and is trading at a forward P/E of 10.83. Moreover, it recently increased its quarterly dividend rates by 9 percent to 24 cents per share, bringing the dividend yield to 1.49%. To sum up the above discussion, I believe that these factors are not yet incorporated in the stock price and the price target of $80 seems to be achievable. Therefore, I recommend buying the stock.
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.