Benchmark Research downgrades DVN, EOG and MRO on valuation

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Benchmark Research downgraded Devon (NYSE:DVN), EOG (NYSE:EOG) and Marathon (NYSE:MRO) to hold ahead of the market open Wednesday, indicating valuations reflect $85-$90 oil (NYSEARCA:USO). While analyst Subash Chandra doesn't see a path towards lower oil prices, he's focused on SMID cap stocks with more compelling valuations.

Benchmark also flagged risk from political cross currents resulting from shale's new business model. Companies have committed to returning cash to shareholders rather than spending it on production growth. As oil prices rally, consumers and Washington have taken notice. A shift back to growth, in response to political pressure, would likely spell disaster for the equities and Chandra thinks a more compelling valuation is required given the uncertainty.

Comments

[bet727]

Too early!

[Energy Alpha]

We haven’t even seen a quarter of what these compare capable of delivering at $100+ prices. A bit premature to remove the Buy rating. I guess there’s always analyst that makes a bold prediction on the off chance that it plays out.

[lmoe85]

For the record, Goldman Sachs has stubbornly maintained a "Sell" rating on MRO since November 2020. Since then, MRO has quintupled. Everyone factor that in when digesting these analyst "expert" ratings. What a bunch of clowns.

[damcooldav3]

@lmoe85 yea I have finally learned to take them with a grain of salt. Yea let’s downgrade oil companies at record high oil prices with no end in sight, no thanks.

[Fluidsdoc]

I agree DVN's come along way. Just the same I think this down grade is a little premature. I'll have an article out soon. If you're following this thread please give it a read. Cheers

[Dream On '59]

Maybe they are shorting? Wish I had gotten in and stayed in DVN. I have been in and out over the last year or so. GREAT shareholder focused returns. I will hold my current position and buy more on weakness. But deffinately overvalued with a 6.7% net yield! (NOT! LOL) My super stock is PEYUF in which I have a cost basis of about $4. I am going to ride that train to $ 25 plus!

[sniper97]

What is EOGs PE ratio? About 9...def overvalued..

[OverTheHorizon]

Agree. Too late to buy these companies. $85 oil by eoy. Buy ol’ King Coal.

[Florian Steinberg]

@OverTheHorizon why will oil drop this year!

I would prefer if it did but I am doubtful that it will...

[OverTheHorizon]

@Florian Steinberg peace could breakout without warning

[lmoe85]

@OverTheHorizon Oil was headed above $100 barrel by summer 2022 regardless of any Russian/Ukrainian conflict due to demand outpacing supply. The war just fanned the flame and brought prices up earlier than expected. Oil will be above $100/barrel throughout 2022. Everyone likes to talk about DVN but I see MRO having the biggest upside given their laser focus on share buy-backs (currently projected to be over $3 Billion, which is 20% of their current market cap, which is insane).

[Orion1963]

My oil investments are based primarily on company profitability. DVN is one of the most profitable oil companies in existence, across all profitability metrics.

Comparison of DVN vs global oil producers Industry Average:

Return on Total Capital Employed (TTM)
DVN 17.47%
Industry Average 4.19%

Return on Total Assets:
DVN 13.38%
Industry Average 2.61%

Net Income Margin:
DVN 21.45%
Industry Average 5.61%

In that DVN's Return on Total Capital Employed, is much higher than the Industry Average, their forward P/E ratio should likewise be higher than the industry average; however, DVN's forward P/E ratio is the lower band at 10.01.

Unless you wish to purchase small cap/high beta oil companies (read high risk) there is no more profitable oil company than DVN.

In addition, we receive a >7% dividend. Thus, I purchased the 'down grade' today.

[McGonicle]

@Orion1234 with dividends, its moved from about $4 to $60 in two years.

Unfortunately, its just had earnings with two "valuation" downgrades. As others have pointed out, if DVN behaved as an incomeless profitless tech stock on these metrics and developments, it would be over $200.

Its struggling to respond to the now very high price of oil, *which may be brief and temporary*, which shows that $58-60 is a very strong resistance and no one is buying up here, even us DVN fanatics. When a commodity stock fails to respond to higher commodity prices in kind (estimated value with oil at $115 = $70-75) its a sign that the stock is likely peaking and I feel a post-dividend dump coming.

Q4 2021 avg price was just under 78
Q1 trend as of close of februrary was 88 avg over 2 months

That means another $10/bbl in freeboard--dividend next $1.18-$1.32

[Orion1963]

@McGonicle
Solid points. And there are several writers/analysts who agree with you completely.

Personally, my guide stone is Return on Total Assets Deployed. Historically, this metric eliminates much of the background financial noise.
Obviously, this metric is most appropriate in high debt denominated industries such as oil/gas/minerals.

It is a rare thing to see a Return on Total Capital Employed exponentially higher than peer companies.

Sincerely, thank you for your well resoned insights. You've been added to my Follows list.

[lmoe85]

@McGonicle Granted your points were about DVN. But Goldman Sachs has stubbornly maintained and reiterated a "Sell" rating on MRO since November 2020. Since then, MRO has quintupled. I personally think that the oil companies are facing resistance right now because there is a sentiment that this conflict (and it's associated oil supply disruption) will be quick. It's my personal opinion that this conflict will not be quick.

[gradantC]

Look at futures market 1 year out $80 WTI.

[Pemberton]

I would argue that MRO is being valued more like $70 oil and I think a recent article made just that point. 2022 earnings will be around $3 per share.
Oil $70 plus they print cash. Breakeven is $35. Today oil is $105, do the math

[lmoe85]

@Pemberton This right here. Everyone loves to talk about DVN because of the huge dividends (granted, DVN a very well run company), but I feel that MRO is the real sleeper that is about to soar once the market comes to terms with just how profitable they are with these elevated prices.

[Badjuan]

You win the award for most unliked article on SA. Congratulations!

[Arch_Duke_Ferdinand]

Benchmark Research, AKA Brigadoon Research operates out of a phone booth on the street corner of 7th Ave and Broadway. Their business card states
"HTTP Error Code 418 The requested URL was not found on this server."

[Tired not Retired]

@Arch_Duke_Ferdinand Ha Ha Ha. Duke, thank you for the laugh this morning.

[the Moon's a Baboon]

What is SMID ?

[blenkep]

Who is Benchmark? Why should anyone give credence to their opinion?

[Jianguo Xin]

Nonss.

[Golfsohard]

Clown

[Kinderer]

Must have been written a week ago.

[Zach Nye]

How soon do they think we get back to $85 oil? How much capital can the companies return to shareholders in between now and then and if some of these companies buy back 20% of their stock between now and then, how much lower does that number go? Wish I had pulled the trigger on EOG at $88 but I finally picked some up at $107. They can keep sleeping on oil but I'll keep sleeping well at night with my 40% allocation to oil (including midstream).

[cenc]

and we give a sh*t why?

[sliman21]

U.S oil stocks will go higher but it is the Canadian oil stocks that are super cheap. MEGEF, CVE, AETUF, BTEGF Etc. Look up Eric Nuttall