Devon Energy (DVN)

[dan_s]

Devon Energy (DVN) is one of the largest companies in the Sweet 16, but it is by far the most complicated to model. Their first quarter production came in above my forecast, but much lower Bitumen and NGL prices caused earnings and cash flows to come in slightly below my forecast. It seems that each quarter some of the individual line items in their actual report come in quite a bit different than my forecast model, but the bottom line is very close. Maybe I am just lucky on this one.

Regardless, Devon is a world class outfit with steady production growth locked in and strong cash flows from operations. They have large project areas with lots of running room. My Fair Value Estimate of $86.75/share is only 6X operating cash flows per share, a very low multiple to be using for a company of this quality.

Cash flow from operations this year should be approximately $5.2 Billion, compared to their capital expenditure budget of $4.4 Billion.

BTW the forecasts submitted to First Call for Devon are all over the place, so I don't feel alone in finding this one difficult to forecast. First Call's Price Target is $72.95. It has been drifting higher since the first of this year. One excuse for the difficulty in modelling Devon, is that they have had a lot of moving parts the last few years. As Wall Street analysts gain more confidence in their forecast models, they should raise their price targets.

Devon currently gets most of their revenues from oil sales, but it does produce a lot of natural gas (over 1.6 Bcf per day) and a lot of NGLs (140,000 Bbls per day). I think natural gas and NGL prices could be a lot higher by year-end, so there is definitely upside to my valuation for DVN.

NOTE: Devon took a $5.5 Billion non-cash impairment charge against their fixed assets at the end of March, so keep that in mind if you look at balance sheet ratios on this one. IMO their assets are worth much more than the book value under this industries very conservative GAAP rules.