Devon Energy (DVN) Update - Sept 19

[dan_s]

I'm still working on my Devon Energy forecast model, but here are a few highlights to consider.
DVN closed at $9.78 on Friday, September 18
In the last 3 months, 17 ranked analysts set 12-month price targets for DVN that range from $13 to $33. The average price target among the analysts is $15.87.

The #1 reason I decided to take a hard look at DVN was because on 8/28/2020 Stifel rated it a BUY with a $33.00 price target. In fact, they had DVN listed as the most undervalued large-cap in the 20+ large-cap upstream companies that they follow. In Stifel's 4P / ultimate upside case they say it has the potential to run up to $41 share. If WTI spikes to $70/bbl and ngas pushes over $3.00 that might happen. . The next highest price target is $21 by Merrill Lynch.

Why it is being added to our Sweet 16:
1. Devon will generate ~$500 million of free cash flow from operations this year. < This does not include the cash proceeds from asset sales. See press release below.
2. Devon sold all of their Canadian assets in 2019 and early 2020. All production now in the USA.
3. Four Core Areas: Delaware Basin, Anadarko Basin, Eagle Ford and Powder River Basin.
4. Q2 production was 325,000 BOE per day (47% crude oil, 32% natural gas and 21% NGLs)
5. Strong Balance Sheet with $4.7 Billion of liquidity on 6-30-2020.
6. Reducing debt and committed to fund all future growth with cash flow from operation.

Devon Energy Provides Barnett Update, Announces Special Dividend and Outlines Next Steps in Cost-Reduction Plan
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KEY HIGHLIGHTS

Accelerating Barnett Shale closing to Oct. 1, 2020, from previously scheduled date of Dec. 31, 2020
Board of directors declares a $100 million special dividend in conjunction with Barnett closing
Expect to achieve $300 million of sustainable cash cost savings by year-end
Plan to use cash on hand to repurchase up to $1.5 billion of additional debt

OKLAHOMA CITY, Aug. 04, 2020 (GLOBE NEWSWIRE) -- In conjunction with its second-quarter earnings announcement, Devon Energy Corp. (NYSE: DVN) provided an update on the timing of its Barnett Shale divestiture closing and outlined details on the next phase of its strategic plan. These strategic initiatives include the return of cash directly to shareholders, a plan to streamline corporate and operating costs across the organization and the resumption of its debt reduction program.

BARNETT SHALE DIVESTITURE TO CLOSE AHEAD OF PLAN

Devon and Banpu Kalnin Ventures plan to accelerate the scheduled closing date of the Barnett Shale asset sale to Oct. 1, 2020, from the previously arranged date of Dec. 31, 2020. After accounting for purchase-price adjustments, which include an upfront deposit of $170 million and allocated revenues and expenses from the effective date, Devon expects to receive a net cash payment of more than $300 million at closing.

The Barnett Shale sale agreement also provides Devon the opportunity for contingent cash payments of up to $260 million based upon future commodity prices, with upside participation beginning at either a $2.75 Henry Hub natural gas price or a $50 West Texas Intermediate oil price. The contingent payment period commences on Jan. 1, 2021, and has a term of four years. The contingent payments are earned and paid on an annual basis.

BOARD AUTHORIZES $100 MILLION SPECIAL DIVIDEND

With the accelerated closing of the Barnett Shale divestiture, Devon’s board of directors has declared a special dividend in the amount of $0.26 per share of Devon common stock. Based on the current number of outstanding shares, this special dividend will result in an aggregate payment of $100 million to shareholders by Devon. The special dividend is payable on Oct. 1, 2020, to shareholders of record at the close of business on Aug. 14, 2020. This special dividend is in addition to the regular quarterly cash dividend of $0.11 per share.

“With the visibility we have on the early closing of the Barnett transaction, I am excited to announce that we are returning a portion of the proceeds to our shareholders in the form of a $100 million special dividend,” said Dave Hager, president and CEO. “The decision to issue a special dividend is consistent with our disciplined strategy and demonstrates our firm commitment to return increasing amounts of cash directly to our shareholders.”

TARGETING $300 MILLION OF SUSTAINBLE CASH-COST SAVINGS BY YEAR-END

Another important initiative the company announced today is a plan to deliver sustainable, cash-cost reductions of $300 million by year-end 2020. The cost-reduction plan includes several actions to better align the workforce with go-forward activity levels, achieve more efficient field-level operations and decrease financing costs. The PV-10 of this cost savings plan is estimated to exceed $1 billion of value over the next five years.

A key contributing factor to the cost-reduction plan is Devon’s intent to repurchase up to $1.5 billion of its outstanding debt. The debt-reduction program is expected to result in a go-forward interest savings of approximately $75 million on an annual run-rate basis. The company plans to evaluate various transaction structures to achieve this debt reduction target, including open-market purchases and tender offers.

“As we navigate through the challenges presented by COVID-19, Devon continues to transform how it operates. The next phase of our strategic plan is to take meaningful and decisive steps to sustainably improve our cost structure and reduce debt,” said Jeff Ritenour, executive vice president and chief financial officer. “The aggressive reduction of cash costs across our organization is expected to drive down per-unit expenses by an incremental 10 percent versus our second-quarter 2020 results.”

ABOUT DEVON ENERGY

Devon Energy is a leading independent energy company engaged in finding and producing oil and natural gas. Based in Oklahoma City and included in the S&P 500, Devon operates in several of the most prolific oil and natural gas plays in the U.S. with an emphasis on achieving strong corporate-level returns and capital-efficient cash-flow growth.

[dan_s]

I have finished updating my forecast/valuation model for Devon Energy (DVN) and I have posted it to the EPG website.

Here is what I like:
> Very Strong Balance Sheet and lots of liquidity.
> 2020 cash flow from operations should be $1,450 to $1,500 million, which compares to their capital expenditure budget of $950 million to $1,000 million.
> If they get a realized oil price of $50/bbl in 2021, Devon's operating cash flow should top $2Billion.
> In addition, they will be picking up over $500 million of cash proceeds from non-core asset sales this year.
> In addition to the special dividend they intend to pay when the Barnett Shale assets sell on October 1 of $0.26/share, Devon's regular quarterly dividend is $0.11/share.
> They will have ~100 high potential DUC wells at year-end, which they can hold to complete quickly when commodity prices improve.

So, DVN offers more than a 4% dividend yield at today's share price + the potential to double over the next twelve months.