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Why Devon Energy Corp Stock Slumped Nearly 20% in October

By Matthew DiLallo – Updated Nov 9, 2018 at 9:03AM

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Turbulence in the oil market and some production problems in Canada provided lots of short-term pain for investors last month.

What happened

Shares of Devon Energy Corp (DVN -8.60%) plunged in October, falling 19.4% for the month, according to data provided by S&P Global Market Intelligence. Weighing on the stock was a slump in crude prices as well as a lackluster production report. Analysts, however, saw the sell-off as a reason to buy.

So what

Oil prices hit the skids last month, tumbling more than 10% on growing worries that market fundamentals were beginning to soften. Oil traders fretted over rising production at a time when demand was starting to cool off, which could lead to an oversupply in the coming months. Those oil market worries weighed on most oil stocks, including Devon, since it gets the bulk of its earnings from crude.

An oil pump with the sun setting behind it.

Image source: Getty Images.

In addition to the weight of falling crude prices, Devon provided investors with a disappointing production update last month. The company said it needed to complete some additional maintenance work at its Jackfish facility in Canada, which would cause its production in the third quarter to come in at the low end of its guidance range. However, it did note that its U.S. output beat expectations.

Devon's sell-off last month caused several analysts to grow more bullish on the stock. JP Morgan, for example, said that the recent pullback was a time to buy, noting that the company's strong results in the U.S. outweighed the near-term challenges in Canada. Meanwhile, MUFG raised its price target on Devon's stock from $46 to $48 due to the strong improvement in natural gas liquids (NGLs) pricing, which will benefit the company's profits since it's a major NGL producer. Capital One also put out a bullish note last month, upgrading Devon from equal weight to overweight due to its low valuation.

Devon would go on to prove that those analysts made the right call in November. The company reported excellent third-quarter results, with its earnings coming in well ahead of their consensus estimate. That strong report has helped push shares up about 5% so far this month.

Now what

While Devon has started rebounding from its October swoon, shares remain inexpensive given the cash flow it's producing these days. That's why the company is buying back its stock as fast as it can, with it repurchasing 13% of its outstanding shares so far this year, and on pace to buy back 20% by early next year. That needle-moving buyback is among the many factors that make Devon one of the top oil stocks to buy right now.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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