Devon Energy: Appealing Investment In Oil And Natural Gas

Buy-recommended Devon Energy (DVN)’s first quarter 2007 results reported on May 2 affirm our estimate of Net Present Value [NPV] of $115 a share. NPV includes some $13 a share for the company’s leading resource position in the Deep Tertiary Trend in the Gulf of Mexico, an amount that justifies a difference in NPV compared to that indicated by a correlation with reserve life and cash flow for some thirty companies.

Taking account of debt and considering the current stock price, we compute an unlevered McDep Ratio that is the lowest of large cap independent natural gas and oil producers in our coverage. The low McDep Ratio enhances Devon’s appeal as a participation in a renewed uptrend in long-term oil and natural gas commodity price. Devon’s NPV is concentrated 53% on natural gas, the commodity that could appreciate 70% relative to oil in a strong demand situation.

Not least, we like to repeat that Devon’s co founder and chairman, Mr. Larry Nichols, has a long, distinguished record of making money for investors. We favor the stock at a double weighting in our illustrative energy portfolio concentrated on real assets that promise a high return providing clean energy for global growth.

Originally published on May 2, 2007.

DVN 1-yr chart: