When looking for a deep and diversified oil and gas portfolio, smart investors wisely examine Devon (DVN). The company itself is deep and diversified and reflects significant long-term growth potential.
With competitors like Cabot Oil & Gas (COG), Comstock Resources (CRK), and Canadian Natural Resources (CNQ) gaining traction with new plays, Devon will still remain ahead of the pack with its consistent discipline of selfishly holding onto capital until it is time to prudently ration out resources for worthy projects. With natural gas prices roller-coaster ride, the company continues to focus on oil and liquid rich opportunities concentrated mainly in various North American onshore areas that extend from the Canadian arctic to the Gulf Coast in the United States. The company holds 13 million net acres, of which roughly two-thirds are undeveloped. With this insight and the potential for even greater plays, I believe Devon to be a winner that every oil and gas investor should own.
Devon is an independent energy company, engaging primarily in exploration, development, and production of oil, natural gas, and natural gas liquids. The company has a market cap of $23.89 billion, and a P/E ratio of 11.3, above the average energy industry P/E ratio of 5.2 and below the S&P 500 P/E ratio of 17.7. According to the first quarter results, Devon reported production of 694,000 barrels of oil equivalent (BOE) per day in the most recent quarter, up 10% from the first quarter of 2011. The company has plenty of room to grow with plays in various locations not yet tapped. In the Utica shale in Michigan, the company has 340,000 acres and 235,000 acres in the Utica shale in Ohio.
One of the most profitable regions for Devon is the Permian Basin in Texas and New Mexico where the company currently has 21 rigs, adding five rigs in the first quarter of 2012, and competes with the Apache (APA) which has 31 rigs in the basin and Concho Resources (CXO), with 37 rigs. Although Apache reported for the first quarter of 2012 average production of 99,000 BOE per day in this region, Devon has begun drilling in the Cline Shale, a light oil play in the Permian Basin, where the company has 500,000 net acres. The company believes that this could help expand its liquids production in the Permian Basin to 70,000 barrels of oil-equivalent a day by year 2015. The company has also completed 16 wells in this first quarter and reported an average production rate of 580 BOE from each of these wells where it is working on the Bone Spring play in the Permian Basin.
Many "experts" consider Devon to be undervalued and underrated. The company got rid of some of its offshore assets and raised enough money to chop away at some of its debt, spend $3.5 billion to repurchase 11% of its shares outstanding, and still end up with $7.1 billion of cash to spend on new plays. One relatively new play, the Niobrara Shale is in the Denver-Julesburg Basin stretching between Northeast Colorado, Northwest Kansas, Southwest Nebraska, and Southeast Wyoming, where shale oil deposits rest roughly between 3,000 and 14,000 feet down and where Devon acquired about 100,000 net acres in far Southeast Wyoming. This area quickly has become one of the most active oil shale plays in the nation.
In Montana, where Devon is one of the largest natural gas producers, the company has 1.2 million acres under lease, 900 producing wells, and more than 1,000 miles of operating pipeline. This is a big plus to consider when, not if, natural gas prices begin rising once again. Then, of course, there are the newly tapped resources of Jackfish 1 and Jackfish 2 oil sands projects in Canada which averaged a record 46,000 barrels per day in the first quarter, representing a 55% increase over the year-ago quarter. Jackfish 2 production is now at 21,000 barrels per day and will continue to ramp-up throughout 2012, and construction of Devon's third Jackfish oil sands project is now approximately 40% complete and is expected to produce 35,000 barrels per day when it is up and running in late 2014.
Devon has the potential for incredible growth that should bring smiles to the faces of investors. Even though the company employs about 5,400 people, it still will need even more geologists, oil rig laborers, and engineers to keep pace with its current growth. That is not necessarily a bad thing in today's employment market. Workforce growth should be easier if the hiring phase begins now.
Devon's revenue growth has outpaced the industry average of 11.8% and revenues rose 16.3%. Devon's gross profit margin is currently at 62.30% with a net profit margin of 15.70%. The company reported first quarter 2012 earnings of $1.05 per share, and the company has improved earnings per share by 13.2% in the most recent quarter compared to the same quarter a year ago.
The company had first quarter 2012 revenues of $2.50 billion, 3.40% below the prior year's first quarter results, and had revenues for the full year 2011 of $11.45 billion, 15.23% above the prior year's results. Devon's Board of Directors declared a quarterly cash dividend on Devon's common stock for the third quarter of 2012, payable on September 28, 2012 at a rate of $0.20 per share based on a record date of September 14, 2012. Devon reported a 2011 dividend of $0.67 representing a 4.69% increase over previous year.
Devon's strengths are found in multiple areas, including its expanding profit margins, its strong revenue growth, and a solid financial position. The company has ample room to grow using its current position in various oil plays, and should be bought as a long-term play.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.