Devon Energy upgrade to a BUY
Posted: Thu Nov 12, 2015 1:30 pm
Guggenheim’s Subash Chandra and Mashall Coltrain argue that asset sales could help boost Devon Energy’s (DVN) stock price by 25%:
We are upgrading Devon Energy to Buy from Neutral with a $57 price target. At a conference this week, Devon may have expressed some willingness to sell non-core upstream assets. We believe non-core upstream asset sales are required to optimize growth in the core regions at strip prices. CEO Dave Hager identified East Texas, Miss Lime, Granite Wash and Southern Midland Basin as areas that are not receiving capital at low oil prices. He did not explicitly state the assets will be monetized, but we regard them as inferior to Devon’s core opportunities in the Delaware Basin, Cana Woodford and Eagle Ford. A rally in oil is not likely to change that.
Third quarter updates from Devon and other operators such as Anadarko Petroleum (APC) and EOG Resources (EOG) make a case that the resource potential in the core plays should rise from closer density and stacked intervals. Devon’s rising resource potential is outpacing cash from operations; as a result, asset sales are under scrutiny. The market is debating the value of midstream dropdowns such as Access Pipeline and NGPL as the principal means of plugging the gap. The sale of noncore upstream assets can provide greater security of cash inflows while reducing the reliance on midstream sales as the chief catalyst next year.
Volumes from the assets mentioned above are significant. The Southern Midland Basin is the single largest asset producing 48,000 boepd. We estimate the other regions are producing another 48,000 boepd, mainly wet gas (we estimate 56% gas, 44% NGLs). The other regions may be the initial candidate to monetize as operators typically express a reluctance to sell Midland Basin acreage, even if the position is non-core. We estimate proceeds can top $1b for the other assets. The sale of Southern Midland Basin can more than double the proceeds.
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I value DVN at $74.50 per share, compared to First Call's price target of $58.58.
We are upgrading Devon Energy to Buy from Neutral with a $57 price target. At a conference this week, Devon may have expressed some willingness to sell non-core upstream assets. We believe non-core upstream asset sales are required to optimize growth in the core regions at strip prices. CEO Dave Hager identified East Texas, Miss Lime, Granite Wash and Southern Midland Basin as areas that are not receiving capital at low oil prices. He did not explicitly state the assets will be monetized, but we regard them as inferior to Devon’s core opportunities in the Delaware Basin, Cana Woodford and Eagle Ford. A rally in oil is not likely to change that.
Third quarter updates from Devon and other operators such as Anadarko Petroleum (APC) and EOG Resources (EOG) make a case that the resource potential in the core plays should rise from closer density and stacked intervals. Devon’s rising resource potential is outpacing cash from operations; as a result, asset sales are under scrutiny. The market is debating the value of midstream dropdowns such as Access Pipeline and NGPL as the principal means of plugging the gap. The sale of noncore upstream assets can provide greater security of cash inflows while reducing the reliance on midstream sales as the chief catalyst next year.
Volumes from the assets mentioned above are significant. The Southern Midland Basin is the single largest asset producing 48,000 boepd. We estimate the other regions are producing another 48,000 boepd, mainly wet gas (we estimate 56% gas, 44% NGLs). The other regions may be the initial candidate to monetize as operators typically express a reluctance to sell Midland Basin acreage, even if the position is non-core. We estimate proceeds can top $1b for the other assets. The sale of Southern Midland Basin can more than double the proceeds.
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I value DVN at $74.50 per share, compared to First Call's price target of $58.58.