Natural gas prices are 37% lower than they were one year ago, but since bottoming out around $2 in April 2012, natural gas has now reached almost $2.70 per unit. When the price of natural gas begins to go up, investors begin to wonder what energy companies would be a good investment. In this article, I will explain why I believe Devon Energy Corporation (DVN) presents a very strong opportunity for investment in this volatile market environment.
Devon is well positioned to prosper on higher natural gas prices. This will be fueled by increased demand, coupled with lower production by other natural gas producers. Devon will also benefit from its production split of 60% natural gas and 40% oil and liquefied natural gas. Devon is projecting the proportion will be 48% natural gas and 52% oil and liquefied natural gas by 2016. This is a good proportion going forward because even though oil is in a bear market right now, global growth will spur demand, which will elevate prices.
Devon has been able to achieve its goal by utilizing a joint venture with Sinopec International Petroleum Exploration & Production Corporation (SHI) that was formed in January 2012. The agreement enabled Devon to develop wells in the Niobrara, Utica Shale, Mississippian oil, Tuscaloosa Marine Shale and Michigan Basin. The agreement allows for Devon to profit from a 33% interest in the development, through the 1.2 million acres of lease holdings. The deal is sweeter for Devon, with Sinopec agreeing to cover 70% of the development costs up to $1.6 billion. These types of joint ventures will help Devon save money and reach its projected goal of 905 to 955 million barrels of oil equivalents per day.
There are several companies that have joined or formed partnerships to further research on natural gas engines and transportation projects. Companies such as Westport Innovations (WPRT) have signed agreements to furnish new natural gas powered engines for commercial and consumer vehicles with Ford (F) and General Motors (GM).
There are other companies like Clean Energy Fuels (CLNE) that have been instrumental in developing refueling stations for transportation companies in order to facilitate the switch over to liquefied natural gas. The process is slow but ongoing, and one can only imagine that in the future more and more consumers will be purchasing vehicles that run on liquefied natural gas. Even with oil in a bear market and trading around $80 per barrel, companies are still emboldened to develop new breakthroughs in natural gas engines.
I believe these innovations in natural gas will boost its price. Devon is in a position to capitalize when there is an increase in demand. Yes, many other companies will benefit too such as Chesapeake Energy (CHK) but it must survive any future takeover activity and future legal sanctions as well as Exxon Mobil (XOM) and according to CEO Rex Tillerson Exxon Mobil is not faring well in natural gas at this low price.
But I would put my money on Devon because the company has worked hard on controlling output of natural gas as well as showing an annual growth rate of around 23% increase in oil production and a 13% increase in liquefied natural gas. Devon made a conscience choice going into 2012 that the company would increase its oil and liquefied natural gas production of its onshore United States holdings and expand its stake in oil sands in its Northern Canadian holdings. Overall, Devon believes that oil and natural gas liquids production will roughly increase by 16% through 2016 thus making its mixture of natural gas and liquid production more dependable when the market for one turns sour.
Recent Analyst Action
Devon Energy has been downgraded at some investment firms and more recently has been downgraded at TheStreet to hold from buy. But Jim Cramer has been touting the stock as a good buy in the $50s. Now I can understand the downgrades based on the glut of natural gas on the market and the lack of growth world wide. But I believe the current price to earnings ratio at 8.5 for 2013 and earnings projected to be $5.05 per share, Devon could be a very stable investment moving forward. I believe Devon is very attractive to investors that have a little time to buy and hold. An investor should be savvy enough to understand that when a stock is downgraded from buy to hold that the analyst is not necessarily advocating for the investor to sell. But many investors including Jim Cramer believe that in the mid $50s Devon is an excellent opportunity to buy low and sell high even if that means holding the stock for 6 months to a year.
I think we will see a 15% increase in share value by 2013. I like that Devon recently increased its dividend for the last quarter from $0.17 to $0.20, payable in September 2012. This is a sign that the company is feeling secure with its finances for the year. Another interesting development is the continued stock purchases by Director Mary Ricciardello. She purchased 100 shares for nearly $6,800 back in April. She then purchased another 360 shares in June, valued at almost $20,000. The fact that Mary Ricciardello has confidence in Devon is a good sign.
Devon has the right combination of exploration and production at the present moment, and it is positioned well for a rebound. I think most institutional buyers will continue to hold their positions in the company. With improving oil and natural gas prices, Devon's price will only increase.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.