Business models are continuously tested by the market, and there is no greater test than a global crisis. Such economic environment is the epitome of adversity. Because difficulties are not exclusive to one sector or activity, sustaining overall performance turns into an impossible task. That is the environment through which tough and weak business models had to navigate starting on 2007. And while some companies forged a course through the turbulent waters, others sunk into a seemingly bottomless market. One of those making a comeback with steady performance ever since is Devon Energy (DVN). The energy company, concerned with exploration, development and production of oil and natural gas is one of the fortunate ones who built a crisis proof model. Let us see whether performance will continue on the uptrend, and if it holds any potential for a long-term investment.
Steady improvements prompt managerial changes
Performance throughout 2013 for Devon Energy showed overall performance improvements, which have sustained through the first quarter of 2014. During the last quarter of 2014, oil production exceeded company guidance, pushed by a production growth of 32%, increasing cash flow by 26%, while repatriating $4.3 billion of foreign cash during 2013 and setting a record in the company’s proven oil reserves level. In all, the firm reported net earnings of $207 million or $0.51 per common share for the quarter, compared with a net loss of $357 million or $0.89 per common share the previous year.
The good results, however, prompted managerial renewal at Devon Energy. Barbara M. Baumann and John E. Bethancourt have been appointed to the board of directors taking the total number of directors to 10. Additionally, Thomas L. Mitchell joined the company as executive vice president and chief financial officer. “His 30-plus years in accounting and finance coupled with his extensive experience in oil and gas provide him with the ideal background to assume the role of CFO at Devon,” said John Richels, president and chief executive officer.
As management has been updated, the business model will too. Devon Energy announced the completion of the transaction to combine substantially all of Devon’s US midstream assets with the assets of the former Crosstex Energy, Inc. and Crosstex Energy, LP. Another completed transaction refers to the sale of its Canadian conventional assets to Canadian Natural Resources Limited for C$3.125 billion. Last, the firm communicated the acquisition of 82,000 net acres located in DeWitt and Lavaca counties in Texas, at the Eagle Ford shale.
Backed by the market
Financial institutions reporting on Devon Energy have highlighted the positive moment enjoyed by the firm without being too optimistic. Analyst from Guggenheim, Raymond James, Societe Generale, FBR Capital Markets, and Deutsche Bank have all boosted target price for an average on the high seventies per share. Moreover, while Societe Generale rated the stock “Buy”, FBR Capital Markets and BMO Capital Markets expect the stock to outperform peers. JP Morgan Chase and Zacks, however, were more cautious are preferred to forward a “Neutral” rating.
High production and better realized prices, in addition to a stronger balance sheet and position at Eagle Ford, have positioned Devon Energy on a straight path. Moreover, a diversified portfolio, primarily composed of unconventional resources, reflects significant long-term growth potential. Market positioning has benefited from the will to monetize portions of its acreage and enter into strategic ventures with international players bode well for future development goals.
Currently trading at 12.62 times consensus earnings, Devon Energy pulls a 30% discount to the industry average. It is paying $0.22 in the character of quarterly dividends, totaling an annual yield of 1.2%. And although the discount makes the stock tempting, gurus are running away from the stock as the Peter Lynch earnings line sinks into the negative. Most important, the three largest shareholders have not touched their positions since mid-2013, making strong warning statements against prospect investments.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.