I have been pounding the table for mid-major energy concern Devon Energy (NYSE:DVN) since it traded in the low $50s last year. The shares are currently over $70 a share and are up more than 15% this year in a flat market. The company continues to transform itself into a more pure play E&P bet on the exploding energy production coming from the United States. Over the past year the company has sold off some of its Canadian operations and bought substantial new acreage and production in the Eagle Ford.
Its efforts and valuation continues to win plaudits from analysts. Today Barclay's upgraded the shares to "Overweight" from "Equal Weight". In addition, Oppenheimer raised its price target to $85 a share to $75 previously today. Oppenheimer believes Devon will generate $600 million of free cash flow next year, enabling it to reduce its debt. The company also recently announced a technology partnership with General Electric (NYSE:GE) to boost the amount of oil & liquids from wells used in production.
Earlier in the month the company delivered quarterly results that easily beat top and bottom line expectations. The company managed to increase production 7% Y/Y from its core retained acreage. The company has consistently beat quarterly earnings over the past year and consensus estimates for both FY2014 & FY2015 have moved up incrementally over the past month.
Even after the stock's rise so far in 2014, the equity is still cheap. Devon sells for under 12.5x forward earnings, a substantial discount to the overall market multiple of around 16x forward earnings. In addition, Devon is tracking to posting better than 30% year-over-year earnings gains in 2014 which most companies in the S&P 500 would kill for right now. Consensus calls for Devon to post 10% to 15% earnings gains as well in 2015.
The stock is selling for around five times operating cash flow and like Oppenheimer noted it should be able to start to use free cash flow to pay down debt. The company should also continue to benefit from $100 a barrel oil as well as natural gas prices near four year highs. The equity yields 1.4% and I would expect dividend payouts to go up as the company increases earnings and pay down debt over the coming years.
I continue to expect Devon to outperform this increasingly volatile market given its growth prospects and valuation. I would add to my position on any significant drop in the overall market. ACCUMULATE
Disclosure: I am long DVN. 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.