Devon Energy (DVN) Upgrade - Jan 13

[dan_s]

RBC Capital has increased their price target by $2 to $22/per share, which agrees with my current valuation of DVN.

RBC: We updated our 4Q20 estimates to reflect final commodity
prices and made other changes to our model based on our channel checks,
data analytics, and conversations with the company. The 4Q20 earnings
update is important because investors will get an update on formal activity
plans post closing its WPX acquisition. The sooner-than-later variable
dividend is a differentiator for investors that want to see direct cash
returns tied to current oil price strength. < MY TAKE is that Devon's first "variable dividend" will push the share price over $22/bbl.

Key points:
• 4Q20E EPS/CFPS increased by $0.02/$0.03 to $0.03/$0.91 reflecting < My cash flow per share forecast is $0.90 for Q4 2020 and $1.04 for Q1 2021.
higher final commodity prices. Our estimates are slightly above the
$0.02/$0.88 Consensus. Assuming mid-point guidance and final 4Q20
commodity prices, EPS/CFPS would be approximately $0.02/$0.88.
• We model 4Q20 capital spending of $176 million reflecting additional
efficiency gains on its already peer leading Delaware well costs.
• Our model assumes $30 million of severance costs in 1H21 (WPX
severance). DVN is guiding $100 million in G&A synergy cost savings
expected by year end 2021.
• We do not anticipate any large variations in price differentials during
4Q20. We model production at 331 Mboe/d (151 Mb/d oil), towards the
upper end of 318-334 Mboe/d (148-153 Mb/d oil) guidance.
• We increased our target by $2/share to $22/share reflecting slightly
lower well costs, particularly in the Delaware.
• DVN reports 4Q20 earnings AMC on Tues, 2/16/21. A conference call is
scheduled the following day at 11am (ET) and can be accessed online at
devonenergy.com or at 1.877.334.6798 (code 1770705).

Channel Checks & Investment Themes:
• DVN closed its merger-of-equals with WPX Energy on January 7. We
expect the 2021 budget and operational guidance with earnings.
• We believe management will provide a plan that is consistent with
maintenance production levels. This contemplates the previous 70-80%
reinvestment framework, but biased toward the low-end at current strip
commodity prices. This should provide some incentive to add a modest
amount of growth capital during 2H21.
• The main focus remains running the business for FCF; however, under
our price expectations ($53.50/bbl in 2H21) we model DVN growing
1-2% in the back half of 2021 while still generating robust FCF.
• The Delaware should receive the vast majority of the 2021 capital
program, consistent with prior guidance.
• DVN picked up one rig early 2021 in the STACK and we expect the
company will maintain a similar 1-2 rig level over the year due to the
benefits of its DOW JV.
• The variable dividend mechanism remains a top focus and we expect
the payouts as early as 2Q21, putting it well ahead of peers.
• $1.5 billion remains earmarked for debt reductions which should occur
over 2021.