Third Avenue Management Comments on Devon Energy Corp.
Despite the pressure from falling commodity prices, Devon continues to have a very strong financial position, with $7 billion of cash compared to $10.6 billion of debt. Net debt totals only 14% of capital and $0.20 per thousand cubic feet equivalent ("mcfe") of proved reserves. Devon added to its hedges during the quarter and now has 65% of its gas production hedged for the rest of the year at $3.76 per mcfe (versus the current price of about $3) and 85% of its oil hedged at $97 (versus the current price of about $90). The valuation seems to be very compelling at about $9 per barrel of oil equivalent ("BOE") of proved reserves. In 2009 and 2010, Devon exited its less attractive Gulf of Mexico and international operations at a price of about $45 per barrel of proved reserves. More recently, Nexen, a Canadian E&P company, agreed to be sold to CNOOC for about $19 per BOE of proved reserves. Although Nexen's reserves are more heavily weighted to oil, Devon's assets carry less development risk as evidenced by its much lower percentage of proved undeveloped ("PUD") reserves (26% versus 53%).
From Third Avenue's third-quarter letter, by Ian Lapey, portfolio manager.