Devon Energy Corp. (DVN, Financial) has managed to surprise the market yet again with its fourth straight quarterly earnings beat.
The company topped revenue estimates by $1.04 billion and earnings per share estimates by 15 cents. Although Devon Energy performed phenomenally well, its future growth prospects remain in doubt amid a pivot toward a more shareholder-friendly rewards approach. Additionally, the global energy markets have performed well over the past year and may slow down sometime in the near future as prices calm because of economies reopening and shifts in monetary policy.
Production and growth guidance
According to President and CEO Rick Muncrief, the growth projection of 5% "still holds."
"That's the max," he said. "And we really -- to be honest with you, there's so much uncertainty probably as you look out in the outer years. I think for us, look, we'll stick to Nitin and maintain that max that 5% growth."
Devon's recent growth has been linked to its strong foothold in the Permian Basin, which has been one of the few global basins that have produced consistently throughout the pandemic, but management has indicated it believes growth in the area will be halted soon as well.
"I think most of the growth right now has been driven by many of the private operators and recently saw Exxon (XOM, Financial) and Chevron (CVX, Financial) talk about ramping some volumes up," Muncrief said. "I believe they're probably going to be working down their DUC inventory to some degree. But they have not invested as much as they traditionally had out over the two or three prior years. So I do think you're going to continue to see growth in the Permian. I don't think it's unhealthy."
Valuation
A value-add to the stock's intrinsic value could be the company's planned 60% increase in share buybacks, which will amount to 4.5% of its market cap. Looking at the buyback linearly, we're likely to see a fair value of around $58.20 per share.
Furthermore, Devon Energy's PEG ratio suggests the market hasn't quite priced in its earnings growth yet as it is currently trading at 1.32 times below its annualized earnings per share growth. Additionally, the company is trading at a five-year discount according to its regular price-earnings ratio, suggesting its upward mean reversion is far from over.
Final word
Although the oil and gas production space's growth may slow a tad, Devon Energy is in great shape from a valuation vantage point and has much to offer shareholders. Stock buybacks will favor value-seeking investors, and the company's earnings growth is yet to be fully priced in by the market.
