DVN: Credit Suisse Analyst Report

[dan_s]

CS rates DVN "Outpreform" with a target price of $37/share

Re-Equitising A Resource Rich Portfolio
■ Bottom Line: As we reprise inside, DVN has a significant resource of low
cost core of the core shale. However, DVN has come into this downturn with
a higher debt burden. It's fair to say that a significant operational
improvement story has also been overshadowed by the collapse in oil prices.
The good news is that DVN has a lot of capital flexibility given major projects
have been completed. In the last 24 hours, DVN has cut its capital budget
75pct, cut the dividend, announced job cuts and cost savings, and after the
close launched an equity offering. During the down cycle, DVN continues to
improve well performance. DVN's core of the core Eagle Ford, basin Bone
Springs and core Stack should have among the best economics in shale.
The bad news is that a production mix which has a high share of oil sands,
gas, and NGL's today does not work well at current commodity prices (even
if it works very well at the prices we think will be required to meet demand
growth and offset global decline). So DVN's net debt-current cashflow is
stretched. $2-3bn of higher quality disposals and the equity issuance should
help. Consolidated Net debt-cashflow would be 7.5x at the strip in 2017
before any E&P disposals ($42 WTI), but just 3.5x at the CS deck ($54 WTI
in 2017).
■ Changes to NAV: As a result of modelling changes (some assumed dilution
to PDP value for bottom of cycle asset sales and a deferral of PUD drilling)
our NAV fell to $41/sh. Incorporating the equity issuance, it fell to $37/share.
EPS also improves slightly on lower costs, despite lower volumes in 2016/17.