Devon Energy (DVN) Valuation Update - Feb 16

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dan_s
Posts: 34463
Joined: Fri Apr 23, 2010 8:22 am

Devon Energy (DVN) Valuation Update - Feb 16

Post by dan_s »

Devon is one of the SUPER STRONG upstream large-caps in our High Yield Income Portfolio that pays "Fixed + Variable" dividends each quarter.

Devon's Q4 results showed the full impact of the Validus Acquisition that closed on 9/28/2022 less some weather-related production issues, which have very littel impact on my current valuation.

At the time of this post DVN was trading at $56.06.

My updated current valuation is $78.00, which compares to TipRanks current price target of $76.27. Three highly rated energy sector analysts updated their price targets today to $70, $71 and $72.

Based on my forecast, Devon should generate approximately $4 billion of free cash flow from operations this year. It pays nice dividends and it is funding a stock repurchase program.

Based on my forecast, Devon should pay dividends of close to $4.80/share this year for annualized yield of 8.56% based on the current share price.

My updated forecast/valuation model has been posted to the EPG website.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34463
Joined: Fri Apr 23, 2010 8:22 am

Re: Devon Energy (DVN) Valuation Update - Feb 16

Post by dan_s »

Note from RBC Capital

Devon Energy Corporation (NYSE: DVN; 55.72)
Published February 16 2023 18:59:18 EST
Updating Thoughts and Model Post 4Q22 Earnings
Rating: Sector Perform
Price Target: $70.00
Our view: DVN shares have been under pressure following earnings and 2023
guidance that were below market expectations. We think most of the reset has
occurred, and we expect performance to gain a better footing soon. DVN’s financial
position is strong and there is increased flexibility now that debt-reduction efforts
are completed. Accordingly, given recent stock price weakness and an ample cash
balance, stock buybacks should increase to a $300+ million/quarter pace, in our
view.

RBC's comments about the oil & gas markets:
Commodity Comment: Sifting Through Noise Published February 16 2023 13:05:49 EST

Geopolitics, Oil, Natural Gas, Gold, Clean Energy and MENA Research

Alexander Novak’s announcement that Russia would reduce oil production by 500
kb/d next month in retaliation for the price caps sent prices higher and sparked
a flurry of speculation about the motivations behind Moscow’s move. Consensus
expects various fits and starts to China’s reopening over the coming months. We
share such sentiment, with our arsenal of high signal, real time leading indicators
trending sharply higher across the board. While the longer-term story for natural
gas remains intact as global LNG deals and market developments remain in focus,
currently US natural gas prices continue to languish amid limited cold temperatures
and high storage levels. Gold prices have been sort of rebased, but we still think
they are too high and the necessary flows to keep gold at these levels are absent. < The Gold and Oil price normally trade in lockstep. Based on the historical relationship, Brent should be at ~$110/bb.
The effective EU ban on petrol car sales by 2035 passed in Parliament, further
cementing the global shift to EVs.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34463
Joined: Fri Apr 23, 2010 8:22 am

Re: Devon Energy (DVN) Valuation Update - Feb 16

Post by dan_s »

We will be publishing an updated profile on Devon Energy on Tuesday, February 21.

Devon Energy (DVN) stock is dirt cheap
by Daniel Foelber at Motley Fool
February 20, 2023

Exploration and production company Devon Energy reported its fourth-quarter and full-year 2022 results on Tuesday. Last year, the company notched its highest FCF in company history and paid $5.17 in dividends per share. Devon also announced an 11% increase to its fixed quarterly dividend and a share repurchase program aimed at decreasing the outstanding share count by 5%. The company forecasts 2023 production of 643,000 to 663,000 barrels per day and a $3.6 billion to $3.8 billion capital investment plan, which it said can be funded even if West Texas Intermediate crude oil prices fall to $40 a barrel.

Yet despite all of this positive news, Devon stock fell by over 10% on Wednesday, around 16% last week alone, and is now down over 31% from its 52-week high. The stock is under pressure because Q4 production numbers came in lower than expected due to a fire at a Texas gas compression station. And as impressive as earnings and FCF were, they were lower than expected, while spending was higher than expected.

What's more, the company announced a fixed-plus-variable dividend of just $0.89 per share for Q1 2023, which is lower than any quarterly dividend from 2022.

Even after the sell-off, Devon Energy stock is still up 133% in the past three years. The sell-off illustrates the dangers of forecasts and expectations that are so optimistic that even excellent results can't live up to them.

Yet if we zoom out, there's every reason to believe that Devon Energy stock looks like a great value. Its price-to-earnings ratio is just 5.8. And while the company may not pay as many dividends in 2023 as it did in 2022, a $0.89 quarterly dividend will still be a forward yield of 6.7%.

Devon Energy's dividend yield was so high -- and its growth was so fast -- that a cooldown looks relatively disappointing. Yet, in actual numbers, Devon Energy remains a highly profitable and inexpensive stock with an attractive yield.
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Based on my forecast, Devon's 2023 "Fixed + Variable" quarterly dividends should be approximately $4.68/share.
Dan Steffens
Energy Prospectus Group
ChuckGeb
Posts: 945
Joined: Thu Nov 21, 2013 2:46 pm

Re: Devon Energy (DVN) Valuation Update - Feb 16

Post by ChuckGeb »

Well stated. I concur with his analysis.
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