Why Devon Energy Corp. Shares Could Pop 20%

Does this analyst make a good case? Or is it just more noise from Wall Street?

Jun 3, 2014 at 10:07AM

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Devon Energy (NYSE:DVN) gained nearly 1% this morning after Wells Fargo upgraded the natural gas and oil company from market perform to outperform.

So what: Along with the upgrade, analyst David Tameron raised his price target to $85-$90 (from $70-$75), representing as much as 22% worth of upside to yesterday's close. So while contrarian traders might be turned off by Devon's year-to-date price strength, Tameron's call could reflect a sense on Wall Street that the company's production growth prospects still aren't fully baked into the valuation.

Now what: According to Wells, Devon's risk/reward trade-off is rather attractive at this point. "Upgrade is primarily based on a combination of the following: improving production visibility which should drive 20%+ crude growth over the next few years (driven by Permian, Eagle Ford and Canada), peer leading EBITDA growth and debt adjusted cash flow per share, and attractive valuation," said Tameron. With Devon shares still sporting a reasonable EV/EBITDA of 5.4 -- in line with peers -- it's tough to disagree with Wells' bullishness. 

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Brian Pacampara has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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