Can Devon Energy’s Impressive Run Continue?

Source: Devon Energy

Devon Energy (NYSE: DVN  ) has undergone a fundamental transformation with countless large acquisitions to put it on par with the likes of EOG Resources (NYSE: EOG  ) while completing significant divestments involving explosive growth companies such as Linn Energy  (NASDAQ: LINE  ) . While this approach has sent Devon shares soaring from $55 to $80 over the last year, the big question for investors is whether this remarkable run can continue. 

Getting rid of billions in assets
In the last few months alone, Devon Energy has sold Canadian and non-core U.S. assets for more than $5 billion and last Sunday added another divestment to the mix with a $2.3 billion sale of U.S. non-core oil and gas properties to Linn Energy. The latest sale removes roughly 900,000 acres of total land in various regions. Linn Energy gains 4,500 wells and claims there are at least 1,000 more future drilling locations from the purchase.

Linn Energy is an up-and-coming mid-cap oil and natural gas company that's expected to grow revenue 60% in 2014 alone. Therefore, the well-established fundamental benefit that this acquisition will create combined with the potential for new drilling sites could help the stock soar higher.

Divesting while strategically investing
To many it may appear that Devon lost a key and valuable asset, but the divestment was all part of the company's plan to focus on core areas with the most potential per cost. In other words, Devon wants to get the most bang for its buck with assets. The company has been strategically entering the best regions in the country. Specifically, it paid $6 billion for 82,000 acres in the Eagle Ford, an acquisition that is expected to increase production by more than 20% this year alone.

With just 82,000 acres acquired, such a boost to production is impressive, as this is a company that owns roughly 1.3 million acres in the Permian alone and with large presences in other regions like The Bone Spring and Delaware Basin. In looking ahead it does appear that Devon's operational strategy has been effective, as analysts project that revenue will grow 40.7% and 10.8% over the next two years, respectively. Clearly the accelerated growth in 2014 can be traced to its Eagle Ford presence, while future double-digit growth will be created from drilling opportunities and the monetization of its diversified and strong acreage portfolio.

What to like and dislike?
With all things considered, Devon has crossed over to being a growth company within this space, on a similar level to Wall Street favorite EOG Resources, which is considered by many to have the strongest position in the Eagle Ford.

Yet, EOG Resources trades at nearly 20 times forward earnings with expected revenue growth of 18% and 7% over the next two years, respectively. Hence, Devon is not only growing faster but is also cheaper on a stock multiple basis. Not to mention, Devon's operating margin of 26.3% is nearly 100 basis points greater than EOG Resources'.

So why is Devon trading at such a discount, and does it present an investment opportunity? If you look solely at its recent move into the Eagle Ford combined with existing assets and its P/E multiple, then the answer would be yes. However, the company still has high debt exposure, which has been a key concern of analysts and investors alike.

For example, EOG Resources and Devon are expected to finish 2014 with revenue of $17 billion and $14.6 billion, respectively. While EOG Resources is clearly larger, the two companies are comparable on a size basis. Yet, Devon's $15.5 billion in total debt is nearly three times larger than EOG Resources' debt, which might serve as the reason why the latter is considerably more valuable as a company.

Nonetheless, Devon Energy's acquisition initiatives are clearly intended to boost growth, while its divestments are intended to rid the company of assets that could potentially become liabilities to its long-term plan. As a result of these divestments, Devon is then able to pay off debt; and in part due to Linn Energy's recent acquisition, the company expects to reduce its net debt position by $4 billion to end this year.

Foolish thoughts
In retrospect, Devon Energy then becomes much more attractive as an investment opportunity, having growth, margins, and an attractive valuation with less risk due to a reduced debt position. In other words, all signs point to Devon Energy's remarkable year continuing, and this is a company that should get even stronger in the years ahead.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3019394, ~/Articles/ArticleHandler.aspx, 8/30/2015 7:57:31 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:02 PM
DVN $42.20 Up +1.42 +3.48%
Devon Energy CAPS Rating: ****
EOG $77.31 Up +1.52 +2.01%
EOG Resources, Inc… CAPS Rating: ****
LINE $3.30 Up +0.40 +13.79%
Linn Energy, LLC CAPS Rating: ***