Devon Energy Vs. Apache

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 |  About: Devon Energy Corporation (DVN), Includes: APA
by: Andrew Smith

After the recent pullback in energy stocks, Devon Energy (DVN) and Apache Corp. (APA) are both barely up over the last three years. As you can see on the chart below, Apache has slightly outperformed Devon. Apache's total return, including dividends, was 7.42% and Devon's was 3.09%. Devon and Apache both significantly trailed the S&P 500 SPDR (SPY), which had a 46.6% total return during the period.

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(Source: www.BigCharts.com)

Some key valuation metrics for each company are listed immediately below.

Valuation Apache Devon
Price 84.01 58.14
Market Cap 32.8 B 23.5 B
P/E 8.16 11.28
2013 P/E 7.4 10.8
Dividend Yield 0.8% 1.4%
Price/Sales (TTM) 1.94 2.02
Price/Book (MRQ) 1.17 1.09
Operating Profit Margin 44.15% 36.6%
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The production mix for each company during 2012 Q1 was as follows:

Production Mix (Q1 2012) Apache Devon
Oil 45% 21%
Natural Gas 51% 63%
NGLs 4% 16%
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The chart below shows the geographic origin of each company's production in 2012 Q1.

Production Origination (Q1 2012) Apache Devon
United States 37% 72%
Canada 17% 28%
Egypt 21% 0%
Australia 9% 0%
North Sea 10% 0%
Argentina 6% 0%
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At the end of the first quarter this year, Devon had $7.11 billion in cash and short-term investments while Apache had only $384 million. Despite Apache's cheaper valuation and higher oil production component, I recommend Devon based on its strong balance sheet and higher yield. My balance sheet and yield preference is due to the uncertainty in the broader market and the possibility of a prolonged period of weak demand for oil and gas. Devon's cash position will enable it to make opportunistic acquisitions of other entities and property at depressed prices. I also favor Devon's North American production profile over Apache's international one with commensurate geopolitical risk, most significant of which is uncertainty in Egypt (accounts for one-fifth of Apache's production).

Disclosure: I am long DVN.