3 Reasons Devon Energy Corp's Stock Could Fall

Source: Devon Energy Corp. 

Devon Energy Corp  (NYSE: DVN  )  has made a dramatic shift from natural gas to oil over the past few years. That has sent its stock up more than 30% in the past year. While there are reasons for continued bullishness, investors also have to be aware of the risks. Here are three reasons Devon Energy's stock could fall, and that might just open up a buying opportunity for bullish long-term investors.

Focus on oil could backfire

Over the past year, Devon Energy has grown its U.S. oil production by 79%. The company combined both organic production growth in the Permian Basin with its acquisition of a position in the Eagle Ford shale to give its oil production that big boost. Looking ahead, it expects its combined oil production in the U.S. and Canada to grow by another 20% next year. This growth is expected to produce better profit margins for the company. 

However, North America is quickly becoming saturated in oil. This is causing growing price discounts to the global oil benchmark. Currently, U.S. benchmarked crude oil, WTI, is selling for $95 per barrel, while the global benchmark, Brent, sells for around $102 a barrel. There is a concern that oil prices in the U.S. will trade at an even greater discount in the future because of surging shale production. We've already seen this play out in Canada, where Devon Energy realized just under $70 per barrel for its oil last quarter as the country lacks pipeline capacity to get the oil to refineries. 

Because a greater portion of Devon Energy's production is coming from oil, its stock price could fall if oil prices in the U.S. and Canada keep heading lower.

Emerging oil plays might never emerge

Devon Energy's future is built on a mixture of core growth assets that include the Eagle Ford, Permian Basin, Anadarko Basin, Barnett Shale, and the Canadian oil sands. While these assets will drive its growth in the near term, Devon Energy needs to continue to find new supplies of oil and gas to keep growing in the future. Currently, two assets are beginning to emerge that the company hopes will fuel that future growth: The Rockies and Mississippian-Woodford.

Source: Devon Energy Corp. 

Devon Energy needs at least one of these two assets to emerge as an additional core area. That's no small task as the company has had issues in the past with early-stage exploration plays. The company's Utica shale position, for example, turned in poor results, and the company has since given up on pursuing that once-promising shale play. Its acreage simply was located in a weaker spot of the play. There is nothing to say that won't happen again in either the Rockies or Mississippian-Woodford, and while initial results have been more promising, either play could end up being a dud, or at least not economical enough to move the needle. 

Canadaian oil sands' image doesn't improve

In addition to its U.S. oil production, Devon Energy has a large position in the Canadian oil sands, as noted on the following slide.

Source: Devon Energy Corp. 

The problem here is the fact that environmentalists are firmly opposed to the oil sands because the oil is 17% more carbon intense to produce than conventional oil in the U.S. Further, it uses a lot of fresh water, disturbs a large surface area, and is harder to clean up. This is why environmentalists continue to oppose pipeline projects like the Keystone XL, which has had a noticeable impact on the price of oil in Canada. This has forced producers to ship more oil by rail, which eats into their profits. Further, with oil prices low, it limits growth opportunities as the economics of the oil sands aren't as compelling.

Looking ahead, Devon Energy expects its Canadian oil sands operations to begin pumping out over a billion dollars per year in free cash flow starting in 2016. However, that outlook could be affected by falling oil prices. Further, its future growth in the Jackfish area as well as in the Pike project area could be put on hold for a long time if oil prices fall, or even if the Canadian government bows to environmentalists and slows down project approvals.

Investor takeaway

No company is without risk, so investors shouldn't be surprised that Devon Energy has a number of them that could impact the stock price. The biggest risk is oil prices, because that could impact both its emerging oil projects as well as its Canadian operations. While Devon Energy does a good job at hedging oil in the near-term, no company is immune to oil price volatility over the long term. That being said, the longer-term outlook for oil continues to be bright, which suggests that any weaknesses in Devon Energy's stock prices just might be an opportunity for long-term investors to add to their position. 

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 (2) | Recommend This Article (5)

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.

  • Report this Comment On September 04, 2014, at 12:07 PM, Connectamundo wrote:

    In the following 3 sentences, Matt has very succinctly summed up the issues with oil produced from Canadian oil sands: "The oil is 17% more carbon intense to produce than conventional oil in the U.S. Further, it uses a lot of fresh water, disturbs a large surface area, and is harder to clean up.....With oil prices low, it limits growth opportunities as the economics of the oil sands aren't as compelling."

  • Report this Comment On September 08, 2014, at 10:55 AM, danilegg wrote:

    Devon actually doesn't use any fresh water in their SAGD Production. They source their water from Saline water reservoirs, and even that water is recycled. Check out this video that explains how water is used in Devon SAGD wells:

    Skip to 7:30 for explanation of where their water comes from.

Add your comment.

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: 3088491, ~/Articles/ArticleHandler.aspx, 9/3/2015 7:43:35 PM

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...

Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

Today's Market

updated Moments ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

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

9/3/2015 4:01 PM
DVN $40.83 Up +0.11 +0.27%
Devon Energy CAPS Rating: ****