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DVN Deal Makes for Solid Growth, Value Plays

A shift towards shale oil should benefit shareholders in underperforming DVN

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Devon Energy DVNThe hydraulic fracturing boom hasn’t been so kind to Oklahoma-based E&P firm Devon Energy (DVN). While DVN has seen many of its rivals trade for lofty new 52-week highs, the company has pretty much drifted sideways since the market recovered from the credit crisis and Great Recession.

Much of that underperformance has to do with the firm’s continued focus on natural gas drilling.

You see, Devon placed its chips in some of the hottest and upcoming unconventional shale gas resources in North America … at just the wrong time. Back in 2009, DVN began selling its various Brazilian and offshore Gulf of Mexico assets to focus on natural gas. And with natural gas prices trading in the basement, the company’s production, profits and share price have been hurt.

However, two recent moves by Devon to “reinvent” itself could finally be the spark that sends shares higher. And DVN’s chronic underperformance makes it pretty darn cheap. Ultimately, shares of the E&P name could be the best blend of growth and value in the energy sector today.

A Major Shift At DVN

Devon investors’ biggest concern was that it simply wasn’t diversified enough as an energy producer. Virtually all of DVN’s assets focus on natural gas and natural gas liquids (NGLs), rather than crude oil. That’s been a huge issue for the E&P firm as natural gas has been below break-even levels for several of its holdings, while crude oil has surged in price.

Well, times are changing at Devon.

The company entered into a deal to purchase 82,000 acres of prime Eagle Ford acreage from privately held GeoSouthern Energy and Blackstone (BX) for $6 billion in cash. The acquisition will add 53,000 barrels per day of current shale oil production to Devon’s energy mix. However, that those acres have about 400 million barrels of proved reserves — meaning they can actually be tapped. DVN will be able to increase production to 140,000 barrels per day in just a few years by drilling more than 230 wells in the field.

Devon also plans on selling some of its non-core natural gas assets in the U.S. and Canada — totaling about 30% of its current natural gas output.

All in all, Devon estimates that its fourth-quarter production volumes would be about 31% oil if these new Eagle Ford assets are included and the assets being divested are excluded. Currently, only about 25% of its production is from oil. Additionally, Devon should realize a 20% earnings per share bump from the GeoSouthern purchase during 2014.

This newfound shift away from natural gas prompted Chief Executive John Richels to say that investors will “find that the new Devon is a significant North American oil producer capable of delivering high rates of growth in high-margin oil production while generating free cash flow.”

And while free cash flows and higher profit margins are attractive enough on their own, Devon is doing investors one step further.

Article printed from InvestorPlace Media,

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