DVN Upgrade

[dan_s]

I now believe DVN is worth over $100/share (break-up value). Below is what Morgan Stanley thinks. My guess is that if DVN reports strong Q2 results it will get a lot of upgrades. - Dan

Devon Energy Corp: Clearing the Deck
Evan Calio – Morgan Stanley
July 1, 2014 2:33 AM GMT
DVN sells U.S. non-core assets for $2.3Bn. The deal covers the remaining identified assets to divest and allows increased focus on DVN’s three key assets: Eagle Ford, Permian, and Canadian Thermal. The Cana and Powder River provide a strong supporting bench for the 20% oil grower within CF.

Divesting remaining U.S. non-core assets for $2.3Bn: DVN announced the sale of its remaining Rockies, onshore Gulf Coast, and Mid-Con assets to LNCO/LINE which produce 275 Mmcf/d (80% gas) with 1.242 Tcfe of associated proved reserves. The deal was marginally accretive as it translates into an EBITDA multiple of 6.5x (based on 2013 EBITDA of $350mm) vs. DVN’s 5.7x 2014 multiple. Net proceeds are expected to be ~$1.8Bn after tax; deal expected to close in 3Q14.

Further sharpening shift to liquids: DVN’s liquids weighting is now 53% (from 52%) and we expect it to increase to 60% by the end of 2015. We expect proceeds will be used to accelerate key plays, particularly the Permian, Powder River Basin and/or Cana. DVN has executed on transforming its portfolio from low margin assets (Canadian conventional & U.S. gassy non-core) to higher margin plays (Eagle Ford). The increased financial liquidity provides DVN with the opportunity to demonstrate that it can grow organically driven by the Eagle Ford, Permian and Canadian Thermal. Upside comes from the emerging, and increasingly improving Powder River and Cana-Woodford plays. We highlight DVN’s condensate exposure and its potential upside in the event of further easing of condensate exports.

Raising price target to $89 (from $88): Our PT is based on 1.0x our est. risked NAVPS and implies a 5.8x fwd 2015 EVDACF. Risks include commodity prices, capital cost inflation, and exploration risk. Pro forma, our 2014 production forecasts decrease to 658 MBoe/d (from 676 MBoe/d) with resulting EPS/CFPS of $6.08/$16.89 (from $6.15/$17.19). Our 2015 production estimate is now 671 MBoe/d (from 717 Boe/d) with EPS/CFPS of $6.51/$17.44