Devon (DVN) was recently named to Fortune Magazine's World's Most Admired Companies list for the sixth year in the row. Fortune also noted that Devon ranks Number 1 in the "mining/crude oil production" category for social responsibility. Devon's place at the forefront of using liquefied natural gas (LNG) and compressed natural gas (CNG) as alternative vehicle fuels is likely an influence on Devon's placement.
CNG, LNG Drive Vehicles, Devon's Growth
Extended use of CNG and LNG as alternative vehicle fuels is receiving support from multiple quarters. Just last year, the governors of Colorado, Pennsylvania, Wyoming, and Oklahoma (all states in which Devon operates) signed a memorandum of understanding to encourage car manufacturers to develop new natural gas-powered vehicles. The four governors also moved towards converting state fleets to natural gas, with plans to combine natural-gas driven vehicle purchases between their respective states.
In separate presentations to the OSU Energy Conference this past April, Chesapeake (CHK) CEO Aubrey McClendon and Devon CEO John Richels supported increased natural gas production in the U.S., predicting that although prices will not remain depressed for long natural gas will continue to be a cheaper energy source than oil. As Richels noted, energy producers tend to move in "more of a stampede than shift" on the issues. Looking at just a few of the LNG and CNG projects currently making waves in the energy industry proves his point.
Noble Energy (NBL) recently committed $5 million to purchase school buses in Weld County, Colorado - a hot spot for natural gas exploration in the Niobrara - that run on CNG. Previous pilot programs to run buses on CNG in other areas ran out of fuel, due largely in part to the lack of CNG fueling stations. However, with the price of natural gas falling many U.S. energy independents are putting their weight behind CNG-fueled vehicles. One of the most recognizable faces behind CNG is T. Boone Pickens, Co-Founder and Board Member of Clean Energy Fuels (CLNE), which operates 273 CNG stations across the nation.
Clean Energy Fuels received a $150 million investment commitment from Chesapeake last year. Pickens is publicly a supporter of Aubrey McClendon, though he recently dumped all of his Chesapeake stock. What's interesting is Pickens is collecting positions in Devon and Encana Natural Gas (NYSE: ECA) instead. This is a vote of confidence in Devon and Encana, as I doubt that Pickens would leave Chesapeake, a stock he held since 2008, for another under-performer.
Like Devon, Encana is a major player in natural gas fueled vehicles. It recently opened the first LNG filling station in Louisiana, an addition to its four mobile LNG fueling stations and six CNG stations. Encana is also part of the Kitimat LNG project in British Columbia. The project is a joint venture between EOG (EOG), Apache (APA) and Encana, and it competes with a second British Columbian LNG project run by Royal Dutch Shell (RDS.A), Mitsubishi Corporation, China National Petroleum, and Korea Gas.
EOR Methods Solidify Leading Position for Devon
Support for natural gas vehicles does wax and wane. Last February, Wyoming state lawmakers indicated that though the idea of using natural gas as a domestically produced and less expensive vehicle fuel was plausible, using government subsidies to build the needed fueling stations and retrofits might not be. Wyoming Governor Matt Mead stated that "state initiatives, along with interest from companies looking to replace corporate fleets with natural gas vehicles, should create a sufficient demand to which the private sector can respond by supplying necessary infrastructure." However, support for domestically produced natural gas remains strong, especially in Wyoming, from which Devon derives 9% of its U.S. production.
Devon is using enhanced recovery through liquefied CO2 on its Beaver Creek, Wyoming operations to realize production of 5,700 boe per day. This is the only project Devon is currently working with liquefied CO2, but I think that as Devon looks for future opportunities and hones its experience with advanced recovery, further CO2 recovery is likely for the company. To assist Devon and others with enhanced recovery efforts, Wyoming recently allocated $2 million to resolve right of way issues with the U.S. Interior Department's Bureau of Land Management.
Like competitor Chesapeake, Devon is facing increased shareholder activism this proxy season. Shareholders in both companies are requesting increased disclosures related to the companies' lobbying activities. For Chesapeake this action is not surprising given Chesapeake's corporate governance problem, evidenced by McClendon's participation in the FWPP and the board's response to the publicity, its mounting cash flow problems, and its inadequate responses to shareholder proposals and letters. As the crisis continues, Chesapeake is responding more frequently to criticism, and just ahead of its annual shareholder's meeting, Chesapeake announced that four of its board of directors will resign. Major shareholder Southeastern Asset Management will be asked to name three replacements, and Carl Icahn will be asked to name one replacement.
In Devon's case, I think shareholders are unlikely to approve the lobbying disclosures. Chevron (CVX) faced a similar proposal at its annual shareholder's meeting last week; the proposal only received 23% support. Historically, shareholder proposals in the energy industry tend to be voted in the board's suggested direction, with the exception of seasons pockmarked by mismanagement and votes of no confidence. Though Chesapeake has this problem, Devon does not. In fact, Devon is outperforming its competitors; turning again to the Fortune 500 listings, Devon is ranked number 1 in the Return on Revenue category.
Zacks Equity Research reiterated its neutral rating on Devon on June 4, leaving Devon at a Zacks #3 Rank, but I disagree. Zacks currently has a Zacks #3 Rank on EOG and Chesapeake, and putting Chesapeake into the same class as EOG and Devon is extremely misguided. I think Devon is ready to break away. At around $58 per share, Devon is toying with its one-year resistance level. Even better, it is boasting a 1.1 price to book and a forward price to earnings of 8.6, both reasonable ratios for Devon's underlying value.