Devon Energy Corp (DVN): North America’s Answer to the Saudis

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Saudia Arabia’s rulers are less than thrilled by the prolific energy production of North America’s shale and oil sands, prompting them to loosen the Kingdom’s spigots to push down the price of oil. Benchmark West Texas Intermediate (WTI) crude now hovers at around $75 a barrel, a three-year low. As of this writing, the price of WTI is about $20 below its 2013 average.

Devon Energy DVNThe Saudis’ intent is to rain on the parade of oil and gas producers in the U.S. and Canada, but don’t tell that to Devon Energy Corp (DVN), based in Oklahoma City.

This $23 billion independent energy producer’s drilling rigs are tapping shale formations in Oklahoma and Texas, as well as oil sands in Canada, and that should help power DVN stock for some time to come.

Devon’s biggest opportunities these days lay beneath the Permian Basin of West Texas. The Permian is no Johnny-come-lately: It has been producing significant amounts of crude since 1921, and its long-term potential remains enormous.

According to a recent report, the total recoverable resource potential of the biggest formations in the Permian Basin is roughly 75 billion barrels of oil equivalent, second only to the massive Ghawar Field in Saudi Arabia.

From the U.S. Energy Information Administration:

“Crude oil production in the Permian Basin has increased from a low point of 850,000 barrels per day (bbl/d) in 2007 to 1,350,000 bbl/d in 2013. Largely as a result of this growth, crude oil production from Permian Basin counties has exceeded production from the federal offshore Gulf of Mexico region since March 2013, making the Permian the largest crude oil producing region in the United States.”

DVN operates 2,800 producing wells across 1.3 million net acres in the Permian Basin. Through asset sales and joint venture proceeds, Devon has been able to make ambitious but sustainable investments in Permian Basin projects, avoiding the debt that has hobbled its star-crossed competitors such as Chesapeake Energy (CHK), which pursued fast growth with insufficient attention to the consequences.

The Crude Facts

Devon’s methodical expansion strategy amid the riches of the Permian Basin is paying off.

For the third quarter of 2014, Devon reported earnings per share of $1.34 on revenue of $5.34 billion, compared to EPS of $1.29 on revenue of $2.71 billion in the same quarter a year ago. These results blew the doors off Wall Street’s consensus estimates of $1.23 in EPS on $4.15 billion in revenue. In the quarter, Devon produced 640,000 barrels of oil equivalent per day, a year-over-year increase of 19%.

As a sweetener, DVN stock is now trading at a reasonable valuation. Devon’s trailing 12-month price-to-earnings ratio sits at 13.9, compared to the trailing P/E of 19.8 for the independent oil and gas sector. Devon’s prudent growth plan has prompted analysts to underestimate the company’s enormous potential.

Bottom Line

Solid cash flow, low debt and a strong balance sheet combined with growing production are holding Devon Energy in good stead and should help DVN stock survive any shakeout that results from the Saudi-instigated price wars. This independent energy producer is proving that the North American energy revolution is far from over.

As of this writing, John Persinos did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/11/devon-north-dvn-stock-saudis/.

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