Our strongest buy recommendation among large independent producers, Devon Energy (DVN) is part of the legacy of Chairman Emeritus John W. Nichols who passed away on August 3. Mr. Nichols was a pioneer in developing San Juan Basin natural gas using funds obtained from investors after he registered the first drilling fund with the U.S. Securities and Exchange Commission in 1950.
Co-founding Devon in 1971, Mr. Nichol’s son, Larry, has been leading the company for decades, making money for investors and giving us confidence in the company’s future. Meanwhile, second quarter results reported today matched or exceeded expectations. Projected volumes along with futures prices from August 4 promise a high level of unlevered cash flow (Ebitda). Projected cash flow capitalized at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P) supports Net Present Value [NPV] of $170 a share. Though down a few dollars in the past few days, long-term crude oil price remains in an uptrend where today’s settlement of $116 a barrel for delivery over the next six years is above the 40-week average of $104.
On the quarterly conference call, President John Richels was enthusiastic about Devon’s 483,000 acres with Haynesville Shale potential that he called the largest of any company announced to date. Early estimates of 73 trillion cubic feet in place under the acreage may put it in league with Devon’s Barnett Shale where DVN produces 2% of total U.S. daily natural gas volume.
Originally published on August 6, 2008.