Devon Energy Corp (DVN +2.46%) is one of the fastest growing oil companies in America. Overall, the company expects to grow its oil production by 30% this year and another 20%-25% next year. This growth has put it on investors' radar. But, the question is if that growth is enough reason to buy its stock. Let's take a deeper dive into Devon Energy as we consider whether or not now is a good time to buy Devon Energy's stock.
Why Devon Energy thinks its stock is a buy
Devon Energy is focused on becoming a leading North American exploration and production company. While its portfolio is balanced, its growth is focused on oil production. As the map on the following slide notes, the company has a strong position in some of the top oil plays in North America.
Source: Devon Energy Corp Investor Presentation.
As the above slide points out, the company has strong oil-rich opportunities in the Eagle Ford shale, the Permian Basin, and the Canadian oil sands. Moreover, the company has upside to emerging oil plays in the Rockies and Mid-Continent as well as upside to liquids-rich natural gas elsewhere. Finally, the company has a very large ownership stake in both EnLink Midstream Partners LP (NYSE: ENLK) and EnLink Midstream LLC (ENLC +0.00%).
Devon Energy's strong oil position is driving meaningful growth. As this next slide points out, the company's oil focused assets are really driving growth that matters, as the company's pre-tax cash margins are surging.
Source: Devon Energy Corp Investor Presentation
Looking ahead Devon Energy expects its focus on high-margin oil to really drive cash flow growth. In fact, starting next year the company's Jackfish complex in the Canadian oil sands will finally begin to deliver free cash flow. Over the next few years free cash flow from Jackfish is expected to surge to well over a billion dollars annually and keep up that pace for many years into the future, as the following slide points out.
Source: Devon Energy Corp Investor Presentation
Add it all up and there are a lot of reasons why the company's stock could head higher in the future. However, a compelling future isn't reason alone to buy Devon Energy's stock. Let's dig even deeper and take a closer look at the company's valuation.
Drilling down into the numbers
In order to really dig deep into Devon Energy's valuation, we're going to take a look at how the company compares to its top independent oil and gas peers. I'm including Chesapeake Energy (CHK +0.00%), ConocoPhillips (COP +2.23%), EOG Resources (EOG +2.48%), and Pioneer Natural Resources (PXD +0.00%) as all five are focused on unconventional oil production in North America. Further, I'm going to drill down deeper than just the price to earnings ratio and look at a basket of common valuation multiples. Here's what we discover:
|
Company |
Price/Earnings |
Enterprise Value/EBITDA |
Enterprise Value/Total Revenue |
Price/Tangible Book Value |
|---|---|---|---|---|
|
ConocoPhillips |
11.6x |
4.9x |
1.9x |
1.8x |
|
Chesapeake Energy |
27.1x |
6.3x |
1.9x |
1.4x |
|
Devon Energy |
18.6x |
6.8x |
3.4x |
2.2x |
|
EOG Resources |
28.4x |
7.9x |
4.0x |
3.5x |
|
Pioneer Natural Resources |
42.5x |
16.4x |
8.6x |
3.5x |
Source: S&P Capital IQ.
What we find here is that on a relative basis Devon Energy is in the middle of the pack when it comes to its valuation. It's not as cheap as ConocoPhillips, but it's nowhere near as pricey as Pioneer Natural Resources. So, clearly investors are paying a bit of a premium for the company's oil focused growth, but not as high of a premium as other peers are fetching.
Now, we'll take a closer look at how Devon Energy's current valuation compares to its historical valuation. I'm going to use the company's historical average over the past decade and compare it to its current valuation multiples. Here's what we get.
|
Devon Energy |
2014 |
Historical Average (last 10 years) |
|---|---|---|
|
Price/Earnings |
18.6x |
14.9x |
|
Enterprise Value/EBITDA |
6.8x |
5.5x |
|
Enterprise Value/Total Revenue |
3.4x |
3.4x |
|
Price/Tangible Book |
2.2x |
2.5x |
Source: S&P Capital IQ.
Here again we see that Devon Energy is a bit more expensive relative to its historical average. However, it's not wildly overvalued. Further, the company did just merge its midstream assets to create EnLink Midstream in order to unlock the value of those assets. It's a move that seems to have worked as Devon Energy's valuation is now above its historical average.
Investor takeaway
While Devon Energy isn't a screaming bargain relative to its peers, it's not overvalued by any means. That suggests that the company just might be a good buy today for an investor looking for oil-focused growth and isn't concerned about paying up a little bit for that growth. Otherwise, Devon Energy makes a solid watchlist candidate for bargain hunters to watch in case future buying opportunities arise amid falling oil prices.
