It's no secret that Larry's baby has gotten bloated. We've been saying that here at the Fool since at least 2006. Years later, the company is finally taking decisive steps to tackle its underperformance.
Monday's announcement that Devon will shed all of its assets in the Gulf of Mexico and outside North America is a logical extension of past steps to slim down its global operations. Since 2007, the company has sold off assets in Egypt, several West African countries, and the Canadian oil sands. Earlier this year, the firm also began seeking a partner for its Lower Tertiary play in the deepwater Gulf of Mexico.
Perhaps I was understating the case back in May when I said that Devon had gotten in a little too deep. Clearly none of these corrective measures went far enough.
Earlier this month, I argued that Devon needs a differentiator, or it will never stand out from the pack of overachievers in its peer group. Does this move fit the bill? Yes and no.
Mr. Market certainly sat up and took notice, bidding the stock up by nearly 5% yesterday. The excitement is justified. Devon is going to focus on bringing down debt and unit costs, while focusing on sustainable organic production growth. That should translate to better returns on capital, and a re-rating on the stock, taking Devon's valuation closer to folks like XTO Energy
At the same time, with this corporate overhaul, Devon goes from being the poor man's Anadarko Petroleum
That's not a bad thing at all -- I think EOG has a great model. Devon shares may outperform the peer group as investor perceptions shift over the near-to-medium term. Looking further out, though, the company still faces the challenge of standing out from the pack. With plenty of domestic onshore-focused competitors, this feat may prove more difficult than ever.