Devon Energy: Reserves Grow with Production

At the lowest McDep Ratio of large cap independent producers, buy-recommended Devon Energy (DVN) offers unlevered appreciation potential of 48% to estimated net present value [NPV] of $139 a share. Fourth quarter results released today included a gain in proven oil and gas reserves of 5% in addition to replacing 2007 production. Projected volumes along with current futures prices promise a continuing high level of unlevered cash flow (Ebitda).

On December 18 we increased NPV from $129 a share prompted by an increase in long-term oil price for calculating present value to $80 from $66 a barrel. NPV is mostly supported by projected cash flow capitalized at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P). The approximation by cash flow multiple does not include Devon’s deep water Gulf of Mexico potential we have previously valued at $13 a share. That is because those Lower Tertiary formation discoveries and prospects are not yet in latest estimates of proven quantities. Finally, a strong uptrend in oil price portends catch up for natural gas

Originally published on February 6, 2008.