After listening to Devon's Q4 conference call, I have more confidence in my forecast/valuation model.
> I have increased my valuation of DVN by $3 to $58 per share
> At the time of this post DVN was trading at $38.50.
TipRanks: Since Devon announced Q4 results on 2/18 and provided guidance for 2025, 8 analysts have adjusted their price target. The 8 fresh price targets range from $43 to $58 with an average price target of $49.43. 7 of 8 rate it a BUY.
My notes from the call:
> Devon completed a lot of high rate HZ wells in Q4 which caused a production spike into year-end.
> Q4 is also the first full quarter of results for the Grayson Mill Acquisition that closed on 9-27-2024.
> Production will be down quarter-over-quarter in Q1, then ramp up steadily into year-end.
> Devon's natural gas revenues should DOUBLE YOY in 2025.
> They have a lot of upside in the South Texas Eagle Ford and the Anadarko Basin where NGas sells at a premium to HH gas prices.
> They are getting strong well results in the Delaware Basin.
> My forecast is that production will be 825,000 Boepd production in 2025 with a mix of 47% crude oil, 27% natural gas and 26% NGLs.
> Devon will continue to increase dividends and buyback a lot of stock in 2025.
MY TAKE: The new CEO is "Under-Promising so he can Over-Deliver" on production growth this year. During the CC he said free cash flow will be over $3 billion. My forecast is that it will be over $4 billion and I'm just using a 2025 realized natural gas price of $2.52/mcf net of regional price differentials and cash settlements on their hedges.
Bottomline: DVN should be one of the top performing stocks in the Sweet 16.
My updated forecast/valuation model will be posted to the EPG website this afternoon.
Devon Energy (DVN) Valuation Update - Feb 19
Devon Energy (DVN) Valuation Update - Feb 19
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
-
Petroleum economist
- Posts: 375
- Joined: Wed Aug 23, 2023 7:01 am
- Location: The Netherlands
Re: Devon Energy (DVN) Valuation Update - Feb 19
Summary
Devon reported solid 2024 results. The 2024 reserves are not extensive, but the reserves replacement is very sound, allowing the production to stay flat or slightly increase over time. The balance sheet needs reinforcement and limits shareholder returns. Despite this, shareholder returns are at decent level (8%). Profitability is good and the PE is medium low. Both profits and the PE can improve over time with higher gas prices.
Reserves
• Proven reserves increased with 338 M BoE (=18.6%) from 1.817 M BoE (2023) to 2,155 M BoE (2024).
• Most of the reserves growth (247 M BoE =13.6%) stems from the 2024 Grayson Mill acquisition.
• The rest of the growth (=5.0%) stems from the reserves bookings (361 M BoE) outstripping production (270 M BoE) in 2024 with 361-270= 91 M BoE.
• The 2024 proven reserves are equivalent to a meagre 7.2 years of 2025 production. This is well below the industry average of 9.5-10 years.
• 2024 Reserves Replacement Ratio (RRR) was an excellent 361/270 = 1.34, well above industry average of 0.80-0.85.
• The average RRR over the last six years (2019-2024) was a high 1.27.
• The 2019-2024 RRR demonstrates that Devon is consistently replacing the volumes it produced.
• The reserves combined with the RRR mean that Devon can continue to keep its production flat or let it slightly grow, provided that it keeps its RRR above 1.0.
Production
• Q4 production (848 K BoE/d) was well above the guidance of 810-830 K BoE/d.
• If the 117 K BoE/d from Grayson Mill is excluded, the Q4 was 848-117 = 731 K BoE/d. This is almost flat compared to Q3 (728 K BoE/d).
• 2025 guidance is 805-825 K BoE/d, indicating that production remains flat or even slightly down compared to Q4. Devon does not operate in a growth mode.
• After 2025 I assume a limited growth (2% per year).
• Fluids in Q4 were 47% oil, 26% NGL and 27% gas.
• As fluids (47/2627) are aligned with reserves (42/29/29), fluid composition will not change significantly over time.
Balance sheet
• Long term-debt at the end of 2024 was $ 8.398 B, $ 2.7 B above the $ 5.672 B at the end of 2023.
• The increase stems from the $ 3.25 B cash component of the $ 5 B Grayson Mill acquisition.
• The equity/balance sheet ratio was a reasonable but not brilliant 48.2%.
• The long-term debt and the equity ratio mean that the balance sheet need some reinforcement in 2025 and that shareholder returns in 2025 should be limited.
Profitability
• Devon is very profitable.
• 2024 profit was $ 3.1 B (eps=$ 4.82).
• With WTI = $ 70-75/bbl and with rising natural gas prices, the 2025 profit can be $ 3.17-3.66 B (eps=$ 4.81-5.63, PE=a low 6.2-7.3).
• After 2025 the eps can increase to $ 5.50-6.70 in 2029.
Shareholder returns
• The balance sheet does not allow all-out shareholder returns in 2025.
• Devon pays a quarterly dividend of $ 0.24, equivalent to a return of 2.7%.
• Devon bought back share for $ 301 M in Q4.
• I assume that buybacks will continue at this level in 2025, adding 5.3% to the shareholder returns in 2026 for a total of 8.0%.
• After 2025 the returns can increase.
Conclusions
Devon reported solid 2024 results. The 2024 reserves are not extensive, but the reserves replacement is very sound, allowing the production to stay flat or slightly increase over time. The balance sheet needs reinforcement and limits the shareholder returns. Despite this, shareholder returns are at decent level (8%). Profitability is good and the PE is medium low. Both profits and the PE can improve over time with higher gas prices.
Devon ranks a decent 25th in my oil and gas ranking (out of 84).
Devon reported solid 2024 results. The 2024 reserves are not extensive, but the reserves replacement is very sound, allowing the production to stay flat or slightly increase over time. The balance sheet needs reinforcement and limits shareholder returns. Despite this, shareholder returns are at decent level (8%). Profitability is good and the PE is medium low. Both profits and the PE can improve over time with higher gas prices.
Reserves
• Proven reserves increased with 338 M BoE (=18.6%) from 1.817 M BoE (2023) to 2,155 M BoE (2024).
• Most of the reserves growth (247 M BoE =13.6%) stems from the 2024 Grayson Mill acquisition.
• The rest of the growth (=5.0%) stems from the reserves bookings (361 M BoE) outstripping production (270 M BoE) in 2024 with 361-270= 91 M BoE.
• The 2024 proven reserves are equivalent to a meagre 7.2 years of 2025 production. This is well below the industry average of 9.5-10 years.
• 2024 Reserves Replacement Ratio (RRR) was an excellent 361/270 = 1.34, well above industry average of 0.80-0.85.
• The average RRR over the last six years (2019-2024) was a high 1.27.
• The 2019-2024 RRR demonstrates that Devon is consistently replacing the volumes it produced.
• The reserves combined with the RRR mean that Devon can continue to keep its production flat or let it slightly grow, provided that it keeps its RRR above 1.0.
Production
• Q4 production (848 K BoE/d) was well above the guidance of 810-830 K BoE/d.
• If the 117 K BoE/d from Grayson Mill is excluded, the Q4 was 848-117 = 731 K BoE/d. This is almost flat compared to Q3 (728 K BoE/d).
• 2025 guidance is 805-825 K BoE/d, indicating that production remains flat or even slightly down compared to Q4. Devon does not operate in a growth mode.
• After 2025 I assume a limited growth (2% per year).
• Fluids in Q4 were 47% oil, 26% NGL and 27% gas.
• As fluids (47/2627) are aligned with reserves (42/29/29), fluid composition will not change significantly over time.
Balance sheet
• Long term-debt at the end of 2024 was $ 8.398 B, $ 2.7 B above the $ 5.672 B at the end of 2023.
• The increase stems from the $ 3.25 B cash component of the $ 5 B Grayson Mill acquisition.
• The equity/balance sheet ratio was a reasonable but not brilliant 48.2%.
• The long-term debt and the equity ratio mean that the balance sheet need some reinforcement in 2025 and that shareholder returns in 2025 should be limited.
Profitability
• Devon is very profitable.
• 2024 profit was $ 3.1 B (eps=$ 4.82).
• With WTI = $ 70-75/bbl and with rising natural gas prices, the 2025 profit can be $ 3.17-3.66 B (eps=$ 4.81-5.63, PE=a low 6.2-7.3).
• After 2025 the eps can increase to $ 5.50-6.70 in 2029.
Shareholder returns
• The balance sheet does not allow all-out shareholder returns in 2025.
• Devon pays a quarterly dividend of $ 0.24, equivalent to a return of 2.7%.
• Devon bought back share for $ 301 M in Q4.
• I assume that buybacks will continue at this level in 2025, adding 5.3% to the shareholder returns in 2026 for a total of 8.0%.
• After 2025 the returns can increase.
Conclusions
Devon reported solid 2024 results. The 2024 reserves are not extensive, but the reserves replacement is very sound, allowing the production to stay flat or slightly increase over time. The balance sheet needs reinforcement and limits the shareholder returns. Despite this, shareholder returns are at decent level (8%). Profitability is good and the PE is medium low. Both profits and the PE can improve over time with higher gas prices.
Devon ranks a decent 25th in my oil and gas ranking (out of 84).
Harry