Devon Energy upgraded by Barclays
Posted: Tue May 24, 2016 6:22 pm
My valuation of Devon Energy (DVN) is $43.50/share. I believe they have a great leasehold position in the STACK play and that the company is going to attract a lot more attention from Wall Street after they close several non-core asset sales. - Dan
Barclays analyst Thomas Driscoll and team contend that Devon Energy (DVN) is “a premium company at a discount.” They explain why:
We believe dramatically improved asset quality and execution has laid the groundwork for changing perceptions. The 20-25% discount (to the peer group) will likely narrow and perhaps turn into a premium as Devon delivers top-tier returns and improves the balance sheet. We reiterate our Overweight rating and are raising our price target by $4 to $38 per share.
Asset quality has improved significantly. Acquisition of two “world-class” assets, plus the 500,000 acre Delaware Basin asset, gives Devon strong positions in three first-class unconventional plays. The $6 billion Eagle Ford acquisition (from Geosouthern in Nov. 2013) and the $1.9 billion STACK acquisition (from Felix) announced in December 2015 provide Devon with top-quality assets in two of the best onshore plays. Returns in these two areas are comparable to those in the Delaware Basin’s Bone Spring and Leonard Sands. These three top-tier assets join a “supporting cast” that includes assets in the liquids-rich Woodford play (50% with Cimarex Energy (XEC)), the Powder River Basin (the drilling opportunities are primarily in the Turner formation), Heavy Oil assets in Canada (including Jackfish, Lloydminster and Pike) and the mature Barnett natural gas field.
Devon’s 90-day [initial production rates, or IPs,] improved from middle of the pack in 2012-2013 to #1 in 2015, according to third party data…While Devon’s relative ranking versus other companies may be positively or negative impacted by the overstatement of the value of [natural gas liquids, or NGLs,] using this method, we believe the improvement from “average” in 2012 to #1 in 2015 reflects real improvement in Devon’s delivery. The change in relative rankings since 2012-2013 will likely drive a rising relative multiple as perceptions catch up to reality.
Net debt ($7.7 billion net of EnLink) is being addressed. Devon plans to sell $2-3 billion of assets this year and to use 2/3 of the proceeds to reduce debt. Debt will likely fall ~20% as a result. The remainder of the sales proceeds will be used to support a $1 billion E&P budget in 2015.
As a result, Driscoll raised his price target on Devon to $38 from $34.
Barclays analyst Thomas Driscoll and team contend that Devon Energy (DVN) is “a premium company at a discount.” They explain why:
We believe dramatically improved asset quality and execution has laid the groundwork for changing perceptions. The 20-25% discount (to the peer group) will likely narrow and perhaps turn into a premium as Devon delivers top-tier returns and improves the balance sheet. We reiterate our Overweight rating and are raising our price target by $4 to $38 per share.
Asset quality has improved significantly. Acquisition of two “world-class” assets, plus the 500,000 acre Delaware Basin asset, gives Devon strong positions in three first-class unconventional plays. The $6 billion Eagle Ford acquisition (from Geosouthern in Nov. 2013) and the $1.9 billion STACK acquisition (from Felix) announced in December 2015 provide Devon with top-quality assets in two of the best onshore plays. Returns in these two areas are comparable to those in the Delaware Basin’s Bone Spring and Leonard Sands. These three top-tier assets join a “supporting cast” that includes assets in the liquids-rich Woodford play (50% with Cimarex Energy (XEC)), the Powder River Basin (the drilling opportunities are primarily in the Turner formation), Heavy Oil assets in Canada (including Jackfish, Lloydminster and Pike) and the mature Barnett natural gas field.
Devon’s 90-day [initial production rates, or IPs,] improved from middle of the pack in 2012-2013 to #1 in 2015, according to third party data…While Devon’s relative ranking versus other companies may be positively or negative impacted by the overstatement of the value of [natural gas liquids, or NGLs,] using this method, we believe the improvement from “average” in 2012 to #1 in 2015 reflects real improvement in Devon’s delivery. The change in relative rankings since 2012-2013 will likely drive a rising relative multiple as perceptions catch up to reality.
Net debt ($7.7 billion net of EnLink) is being addressed. Devon plans to sell $2-3 billion of assets this year and to use 2/3 of the proceeds to reduce debt. Debt will likely fall ~20% as a result. The remainder of the sales proceeds will be used to support a $1 billion E&P budget in 2015.
As a result, Driscoll raised his price target on Devon to $38 from $34.