Energy Prospectus

This supports an even higher price target for DVN

Devon Energy Sells Barnett Shale Assets For $570M

Days after announcing plans to merge with Tulsa-based WPX Energy (WPX), Devon Energy completed the sale of its natural gas assets in the Barnett Shale to Banpu Kalnin Ventures for $570 million.

Devon Energy (DVN) received a cash payment of $320 million from Banpu Kalnin after adjusting for the $170 million deposit it received in April. The company is eligible to receive additional cash payments of up to $260 million over the next four years based on future commodity rates. The contingent payments will start if the Henry Hub natural gas price rises above $2.75 or West Texas Intermediate oil price rises above $50. < HH gas price are already over $2.75 and WTI should be over $50 mid-2021.

In August, Devon announced that it would issue a special dividend of $0.26 per share related to the Barnett sale, resulting in an aggregate payment of $100 million, which was in addition to the regular cash dividend. On Oct. 2, Lisa Adams, Devon’s corporate communications director, confirmed to The Oklahoman the issuance of the special dividend.

On Sept. 29, Truist Financial analyst Neal Dingmann upgraded Devon to Buy from Hold saying that the company looks much stronger post-deal, especially as it gives an assurance about the company’s dividend. The analyst believes that the yield could climb over 10% by next year, when measured on the current stock price. In response, the analyst raised his price target to $16 (66.7% upside potential) from $14 previously.

Currently, the Street has a bullish outlook on Devon Energy stock. The Strong Buy consensus is based on 14 Buys and 3 Holds with no Sells. The average analyst price target of $15.56 implies upside potential of about 62%. However shares have declined 62.3% year-to-date.

DVN is one of the Top 3 Picks by Wells Fargo.

Devon Energy, the last stock on this Wells Fargo list, is another North American energy play. This mid-cap company operates in mainly in the New Mexico-Texas-Oklahoma area, with some additional operations in Wyoming. As of the end of 2019, Devon held over 1.8 million acres of mineral rights and 10,800 producing well. Net production last year was 323 thousand barrels of oil equivalent per day, and reserves totaled 757 million barrel of oil equivalent. Approximately two-thirds of this total is liquids, with the rest as natural gas.

Like the other companies above, Devon is struggling with low oil and gas prices, falling revenues, and low earnings. In Q2, revenues fell sequentially from $2.09 billion to just $394 million. EPS dropped into negative territory with an 18-cent per share net loss.

But there was good news, too. Devon reported greater operational efficiency in the quarter, pushing total capex down to $203 million for the quarter, a savings of 10%. Oil production in the quarter beat the guidance by 3,000 barrels per day, reaching 153K barrels. But most importantly, the company finished Q2 with no debt maturities until 2025 and $4.7 billion in available liquid assets, including $1.7 billion in cash.

Since the second quarter ended, Devon has made two important moves that bode well for future performance. First, Devon completed the sale of its assets in the Barnett Shale, netting $320 million in cash at the closing. And second, the company announced it will enter a ‘merger of equals’ agreement with competitor WPX energy. The merger is an all-stock deal and will create the largest unconventional oil and gas producer in the US.

Analyst Thomas Hughes was impressed by Devon’s merger, and what that transaction says about the company’s overarching plan. Referring to the near-term.

“Management expects to generate ~$575 million of annual cash flow improvements by YE21 through initiative already underway at Devon (~$300mm) and synergies from the [WPX merger],” Hughes wrote.

Looking ahead, Hughes sees Devon following a careful plan with a clear goal in mind.

“We believe the huge portfolio transformation Devon has undergone over the past 5+ years has been an impressive look at how a large-cap, diversified oil producer can pivot its focus. Acknowledging the challenging road Devon has traversed, "New Devon" looks to further focus operations on core parts of U.S. shale by divesting Canadian Oil Sands and Barnett assets (also Rockies CO2). We see the target of "New Devon" as achievable with the remaining U.S. Shale assets being above average, anchored by a strong position in the Delaware.” the analyst noted.

In line with these comments, Hughes rates DVN as Overweight (i.e. Buy). His $18 price target is indicative of an 106% one-year upside potential.

All in all, the 17 recent reviews on DVN include 14 Buys and 3 Holds, supporting the Strong Buy analyst consensus. The stock’s average price target of $15.56 implies a 60% upside from the current trading price of $9.75. (See DVN stock analysis at TipRanks)