2023-12-26 10:10:10 ET
Summary
- DVN's inherent undervaluation may be a gift for investors with a long-term investing trajectory, with the recovery in the macroeconomic outlook likely to trigger the eventual normalization in its stock valuations/prices.
- Most importantly, the management continues to execute brilliantly, further demonstrating why it does not deserve to be beaten down and unappreciated as it has thus far.
- DVN's variable dividend payouts remain compelling, since it allows effective capital allocation across strategic acquisitions, intensified capital expenditure for production growth, and balance sheet improvement.
- DVN may continue generating robust FCF ahead, implying that investors may still look forward to its fixed-plus-variable dividends, with only $957M of its long-term debts maturing through 2025.
We previously covered Devon Energy (DVN) in September 2023, discussing the management's highly strategic choice in embarking on variable dividend payouts, since it allows effective capital allocation across strategic acquisitions, intensified capital expenditure for production growth, and balance sheet improvement.
Combined with OPEC+ cuts and the increased likelihood of a pivot by 2024, we had rated the stock as a Buy then, particularly for income-oriented investors who were comfortable with cyclical industries.
In this article, we shall discuss why DVN's inherent undervaluation may be a gift for investors with a long-term investing trajectory, with the potential recovery in the macroeconomic outlook likely to trigger the eventual normalization in its stock valuations and prices.
Most importantly, the management continues to execute brilliantly, further demonstrating why it does not deserve to be beaten down and unappreciated as it has thus far.
The DVN Investment Thesis Remains Excellent For The Opportunistic And Patient
For now, as the mega oil/gas companies engage in multiple M&A activities, namely Exxon Mobil (XOM), Chevron (CVX), and Occidental Petroleum Corporation (OXY), it is apparent that DVN has been left out in the cold.
This is despite DVN's inherent undervaluation with an Enterprise Value to Proven Reserve ratio of 19.17x, based on its Enterprise Value of $34.71B at the time of writing and the 2022 proved reserves of 1.81M BOE.
This is compared to XOM at 23.6x, CVX at 26.44x, and OXY at 20.93x, based on their Enterprise Value/ 2022 proved reserves of $419.41B/ 17.74M BOE , $296.68B/ 11.22M BOE , and $79.77B/ 3.81M BOE , respectively.
DVN Valuations
The same trend has been observed in DVN's FWD P/E valuation of 7.92x and FWD Price/ Cash Flow valuation of 4.38x, compared to its peers such as XOM at 10.94x/ 7.23x, CVX at 11.16x/ 7.44x, OXY at 14.31x/ 4.64x, and the former's 3Y pre-pandemic mean of 17.73x/ 6.96x, respectively.
If anything, we believe that the discount observed in DVN's stock is unwarranted, since it reported a double beat on FQ3'23 results with revenues of $3.83B ( +13.9% QoQ / -25.9% YoY ) and adj EPS of $1.65 (+39.8% QoQ/ -24.3% YoY).
This is on top of the increased production for oil at 321 MBbls/d (inline QoQ/ +9.1% YoY), gas at 1,070 MMcf/d (+1.5% QoQ/ +7% YoY), and NGL at 166 MBbls/d (+1.2% QoQ/ +7.7% YoY), bringing forth an excellent overall sum of 655 MBoe/d (inline QoQ/ +6.6% YoY).
In addition, the DVN management has already guided for solid FQ4'23 overall productions at between 640 and 660 MBoe/d (inline QoQ/ +2.2% YoY at the midpoint), sustaining the growth in its productions.
WTI Spot Prices
On the one hand, despite the sustained OPEC+ cuts and Powell's dovish commentary in the recent FOMC meeting, it is apparent that the WTI Crude Oil likely won't be able to sustain its elevated spot pricing. At $73.47, it is only trading at a +33.5% premium over 2019 averages of $55, compared to the OPEC+ expectations of over $80s (+45.5%).
It defies expectations indeed, with DVN similarly affected since oil comprises $2.37B (+12.8% QoQ/ -5.5% YoY) or the equivalent 82.2% of its FQ3'23 sales (-2.1 points QoQ/ +13.7 YoY).
On the other hand, while its top/bottom lines are naturally affected by the volatile WTI oil realized prices at $79.81 (+12.1% QoQ/ -5.4% YoY), gas at $2.01 (+2.1% QoQ/ -65.5% YoY), and NGL at $20.72 (+16.4% QoQ/ -39.8% YoY), we are not overly concerned, since this is the inherent nature of a cyclical business after all.
Otherwise, we prefer the term "dynamic."
Either way, thanks to DVN's low breakeven price of $40, we believe that its profitability remains excellent, with the management also recently paying out a fixed-plus-variable dividend of $0.77 per share ( +57.1% QoQ / -42.9% YoY ) by the latest quarter.
This is on top of the sustained share retirement to 639M (-4M QoQ/ -12M YoY), with the final aim of outstanding share reduction by up to -9%.
In addition, we are seeing excellent improvements in the producer's balance sheet, with a decent cash/ equivalents of $654M (+75.8% QoQ/ -43.9% YoY) and moderating long-term debts of $5.67B (-7.9% QoQ/ YoY) by the latest quarter.
Moving forward, DVN expects to intensify its capital investments in the Delaware Basin, with its earlier efforts already bearing great results as the region continues to be its top producer with 440 MBoe/d (+4.7% QoQ/ +4.5% YoY).
As a testament to its efficient operations, the producer has projected a reduction in its FY2024 capex to $3.45B (-10% YoY) despite the sustained overall FY2024 volumes at approximately 650 MBoe/d (inline YoY).
These factors continue to demonstrate DVN's sustainable operations with a balanced execution across shareholder returns, balance sheet improvements, and capital investments.
So, Is DVN Stock A Buy , Sell, or Hold?
DVN 5Y Stock Price
With the DVN stock trading closely to the WTI crude oil spot prices, we believe that its current levels already offer an excellent entry point for income-oriented investors with an appetite for variable dividends.
While readers may have missed the FQ3'23 ex-dividend date of December 14, 2023, there should be future payouts, especially since the EIA expects crude oil spot prices to maintain their premium over pre-pandemic levels.
The Consensus Forward Estimates
Most importantly, DVN is expected to continue generating robust Free Cash Flow profitability ahead, implying that investors may still look forward to its fixed-plus-variable dividends over the next few years, with only $957M of its long-term debts maturing through 2025.
The same has also been observed in data provided by Seeking Alpha, with it recording a TTM Interest Coverage Ratio of 13.23x and 1Y Dividend Coverage Ratio of 7.77x, compared to the sector median of 7.67x and 2.40x, respectively.
As a result, we believe that DVN's dividend investment thesis remains robust, made even more tempting by the stock's inherent undervaluation and recent correction.
In the long term, we remain optimistic about its prospects, with the recovery in the macroeconomic outlook likely to trigger the normalization in its stock valuations and prices, potentially reversing its sluggish movement thus far.
For further details see:
Devon Energy: Overly Beaten Down And Unappreciated - Buy Its Potential Reversal