2024-03-12 04:38:03 ET
Summary
- Devon Energy's stock underperformed its peers in the oil and gas exploration and production sector through 2023.
- The company has struggled with poor capital efficiency and weaker-than-expected oil production growth.
- However, management is taking steps to improve execution and capital efficiency, and Q4 results suggest those moves are paying off.
- With operational issues in the rearview, investors should refocus on free cash flow and long-term value.
- My discounted cash flow valuation target for the stock is above $60.
I last covered Devon Energy ( DVN ) on Seeking Alpha back on June 14, 2023, “ Devon Energy: Limited Upside Near-Term ,” rating the stock a “Hold.”
In that piece, I used a discounted cash flow ((DCF)) model to derive a long-term value target of roughly $60 per share for DVN, a little over a 20% premium to the then-current price of the stock. However, given near-term risks and better opportunities in other exploration and production (E&P) stocks at the time, I felt that wasn’t an adequate margin of safety to warrant buying the stock.
I further concluded that dips to around the $40 area in Devon would offer a better buying opportunity.
Per Bloomberg, shares in DVN are down about 5% since publication including dividends, compared to a gain of roughly 15.3% on the same basis in the widely followed SPDR S&P Oil & Gas Exploration & Production ETF ( XOP ):
In short, while DVN hasn’t fallen a great deal since mid-June last year, it has dramatically underperformed its peers in XOP, an ETF that tracks a basket of more than 50 US-traded oil and gas exploration and production stocks.
While my caution on DVN last summer proved prescient, the outlook has brightened since late last year....
Read the full article on Seeking Alpha
For further details see:
Devon Energy: Turnaround Underway, Time To Buy (Rating Upgrade)