RBC Capital recently raised its price target on Devon Energy (DVN 0.81%) to $57 from $55 and maintained a "sector perform" rating on the stock. My take on a "sector perform" rating is that it is a de facto sell rating, because investors might as well hold the sector through an ETF and eliminate the stock-specific risk inherent in holding one stock.
That said, the $57 price target still represents a nearly 12% upside from the current price, and what the RBC Capital analyst said is also very interesting.
Improving operations and productivity
The company's recent first-quarter earnings report showed that it delivered on its promise to improve well productivity by investing in its core assets in the Delaware Basin. Delivered volumes were 4% above plan to 664,000 barrels of oil equivalent (Boe/d), or 664 MBoe/d in short, for the quarter. Moreover, management raised its full-year production forecast by 2%, to a range between 655 MBoe/d to 675 MBoe/d, from a previous estimate of 650 MBoe/d.
Image source: Getty Images.
According to thefly.com, Wall Street was aware of the improvement. RBC Capital noted well productivity improvements, better cycle times (partly through the use of simultaneous fracturing), and an easing of infrastructure constraints thanks to the "build-out of incremental gas processing, compression, water handling, and electrification," according to CEO Rick Muncrief on the earnings call.
RBC Capital sees benefits ahead of these factors.
A high-yield energy stock to buy?
The price target update makes sense in light of improved operational performance. The company's compelling capital return strategy (combining buying back stock to lower the share count), and distributing a fixed and variable dividend, make it a particularly attractive stock for oil bulls and income-seeking investors alike.
Management believes its stock is currently undervalued and is prioritizing share buybacks. If the price of oil is sustainable at the current levels, then that will prove a wise strategy, as it will increase the share of the claim on potentially increased cash flow from Devon Energy in the future.
