Devon (DVN) Valuation Update - Aug 15

[dan_s]

I have circled back to Devon Energy to take a closer look at the impact that the Validus Acquisition will have on Q4 2022 and 2023 results.
My valuation increases by $4 to $102.
> My Q4 operating cash flow estimate is now $2,590 million ($3.95/share), which compares to TipRanks' CFPS estimate of $3.61.
> My 2023 operating cash flow estimate is now $9,787 million ($15.29/share), which compares to TipRanks' CFPS estimate of $13.62.
> Devon is now a "Free Cash Flow Machine" that should be able to grow production by 5% to 10% annually, while spending less than 40% of operating cash flow on the annual D&C capex.
> Devon's "Fixed + Variable" dividends have been $1.27 for Q1 and $1.55 for Q2, payable on Sep. 30, 2022 to shareholders of record at the close of business on Sep. 12, 2022.
> Devon's aggressive $2 Billion stock repurchase program should also increase per share valuation.

At the time of this post DVN was trading for $62.52

Notes from Neal Dingmann at Truist Financial on 8/10/2022 with my comments in blue:

Transaction Details
• Purchase price of $1.8b in cash, or ~2.0x company estimated cashflows using the 8/5 strip
• 42k net acres, ~35 mboepd (70% oil) of July production, 350 remaining well locations, and 150 potential refracs
• DVN expects to grow production on the assets to ~40 mboepd over the NTM and realize $50mm of potential annual synergies
• Company expects to close the deal at the end of 3Q22 < My forecast model assumes no impact in Q3

Updating Estimates, Price Target Raised to $115 from $110
We are updating our production, capex costs, taxes, and EBITDAX estimates for the
acquisition, with the accretive nature of the deal to our FCF yield driving the increase in
our PT. Our $115 price target is derived from two equally weighted methodologies, with the
first being our ’23 EV/EBITDAX multiple of 6.0x (peer 4.5x) applied to our 2023E EBITDAX
estimate of $11,410MM (consensus of $10,434MM) and the second being a FCF/EV Yield
assumption of 8.0%.

Potential Catalysts
• Further record dividends and incremental share buybacks given strong commodity prices
• Operational efficiencies through integrated sand mine and other OFS drivers
• Efficient integration and near-term upside from RimRock (private) and Validus (private) acquisitions
• Pursuance of incremental natural gas opportunities and further partnership activity