Why I Bought Devon Energy

I've been a fan of Devon Energy (NYSE: DVN  ) , the Oklahoma City-based oil and gas producer, for quite some time now. I feel that the company has an outstanding management team that is genuinely looking out for shareholders, an excellent balance sheet, a great portfolio of North American shale assets, and an attractive valuation, as well as plenty of upside from a recovery in natural gas prices.

That's why I picked up shares of Devon a few months ago when I felt they represented especially great value. Here's a closer look at three reasons why you may also consider buying stock in the company.

Disciplined management focused on per-share results
While one would be hard-pressed to find an E&P – or any company for that matter – that doesn't tout its commitment to shareholders, Devon goes above and beyond its peers in this respect. Through multiple share buyback programs, the company has reduced  its net share count by roughly 20% since 2004, while simultaneously raising its dividend by an annual average of 24% over that time period.

Management has also been successful in improving shareholder value in other, less obvious ways, such as by repatriating  the proceeds from its 2010 and 2011 asset sales back to North America at a much better than expected tax rate of 5%, instead of the 20% the company had initially guided for. The net impact of the company's repatriation of roughly $2.5 billion of foreign cash has been an incremental $400 million benefit, or roughly $1 per share, to the company's shareholders.

Solid asset portfolio
After divesting all of its offshore and international assets back in 2010, Devon has been focusing more aggressively on high-margin, onshore domestic energy plays. The company's vast and diversified portfolio includes large positions in the Permian Basin, the Barnett and Cana Woodford shales, and Alberta's oil sands. Importantly, much of its resource base features low-risk, developmental drilling, which provides ample room to expand production for several years into the future.

Devon's enviable position in the Permian Basin, where it commands a whopping 1.3 million net acres, is especially noteworthy. In the second quarter, the company managed to grow Permian oil production 32 % year-over-year and expects the success to continue into the second half of the year and beyond. Devon's not the only company seeing success in the Permian Basin.

For instance, Occidental Petroleum (NYSE: OXY  ) , which commands a whopping 2.5 million net acres in the basin and accounts for about 16% of its total production,  has seen tremendous success in coaxing more oil from the basin through enhanced oil recovery techniques. The company expects the Permian to drive much of its growth going forward and estimates that its average domestic oil production in the second half of this year will be about 6,000-8,000 barrels  a day more than it was in the first half thanks largely to improved output from the Permian. Similarly, ConocoPhillips (NYSE: COP  ) , which boasts over a million net acres in the basin, hopes to increase its Permian production by 7% each year through 2017, as it continues to de-risk its acreage in the legacy oil play.

Attractive valuation
Last but certainly not least is Devon's valuation. Despite the recent run-up in its stock price, the company remains attractively valued by most measures. It currently trades at about half its net asset value and is valued at just 1.2x book value and about 5x cash flow.  

Fool analyst Joel South believes the company is currently trading at a deep discount to its intrinsic value because of its large exposure to natural gas and problems with takeaway capacity for its Canadian assets. But with natural gas prices expected to recover and pipeline capacity from Canada expected to grow sharply over the next several years, these concerns may prove overblown.

The bottom line
So there you have it – three reasons to consider buying Devon Energy. I purchased shares of Devon earlier this year when they were trading at around $53-$54 a share and plan on holding on to them for a long time, or at least as long as the company's fundamentals remain intact.

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