It’s a great time for investors looking for long-term values among the energy stocks’ wreckage. While there could be more pain to come, much of the damage has been priced into top-notch energy firms across the entire sector.
And one of the best energy stocks bets could be natural gas-focused shale superstar Devon Energy (DVN).
Devon has continued to use the downturn opportunistically to add/divest assets and was quite busy this December. DVN went ahead with several major deals designed to help the firm move through the recent downturn with ease and transform and strengthen the energy stock for the eventual rebound.
All in all, DVN– and its midstream affiliates EnLink Midstream Partners (ENLK) and EnLink Midstream (ENLC) — have the goods to keep going in the years ahead.
For investors, DVN is about as good as it gets with energy stocks.
A Few Big Buys and a Big Sell for DVN
The oil and natural gas rout has not been kind to Devon Energy. Shares of DVN are down about 49% this year as the combination of lower oil and natural gas prices have hurt the firm’s bottom line. There’s a similar story being told at other natural gas/shale rivals like Chesapeake Energy (CHK).
The difference is that DVN has a bright future ahead of itself, unlike many of its struggling sisters.
Much of that has to do with a flurry of activity DVN undertook in December. Devon completed not one, not two, but four separate deals designed to change its asset mix and boost its midstream holdings.
To start with, DVN made a big play for privately held Felix Energy. The $2 billion deal will give Devon access to an additional 80,000 net acres in the STACK play in the Anadarko Basin of Oklahoma. DVN already has a huge legacy position in the Anadarko Basin — around 500,000 acres and 3,200 producing wells.
The buy makes Devon the leading energy producer in the region, holding more than 50% of the premier liquids and condensate acreage.
In addition to the Anadarko Basin buy, DVN added roughly 253,000 acres in the Powder River Basin for $600 million. This purchase will roughly double Devon’s position in the play and features shale that is more than 85% oil.
Both buys feature low-cost well potential thanks to their geology. They also give DVN the biggest leg-up on their completion with regards to the two emerging energy plays. Think about EOG (EOG) in the early days of the Eagle Ford or Continental Resources (CLR) in the Bakken. That’s basically, what Devon has done for these two shale fields.
Through ENLK/ENLC, the firm added some significant midstream assets. The $1.5 billion buy for Tall Oak Midstream will allow it to reduce costs and connect its production in the regions into its overall system.
Finally, in order to help pay for some of this, DVN agreed to sell its assets in the San Juan Basin in New Mexico and Colorado. BP (BP) will pay an undisclosed sum to Devon for the acreage and wells. That acreage has been a part of DVN’s history for a long time.
What Does This Mean for DVN?
The three big buys and the big sale to BP have one thing in common — making DVN more of a big-time oil player.
Historically, DVN has been a natural gas-focused driller. That wasn’t bad when prices were $15 per MMBtu, but with prices cratering even worse than oil — and staying low for a lot longer — being solely a natural gas producer isn’t such a great thing. That’s why Devon has used its position and relatively strong balance sheet to transform itself into a more balanced energy producer.
The recent purchases add plenty of oil and natural gas liquids production and reserves, while the sell rids itself of natural gas.
And DVN’s focus on lower-cost American shale has helped it see rising revenues over the last few quarters. While it’s not a great solution, pumping more oil in the face of lower prices does keep the lights on and get you through tough times.
Looking ahead, as prices eventually rebound, the STACK and Powder River Basin buys place DVN at the forefront of two of the hottest and potentially lowest-cost regions in the U.S.
Making A Play For DVN Stock
Given just how badly Devon has been hit in the shale slump, investors may want to give it a go — especially considering its continuing focus on doing things right and reinventing itself for the future.
The company continues to make the right long-term moves and has the goods to get through the current malaise.
As of this writing, Aaron Levitt is long the Vanguard Energy ETF (VDE), which holds all the stocks in this article.
