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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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Shelving its plans to spin off its own master limited partnership (MLP) for its extensive midstream network, Devon is merging those assets with Crosstex Energy LP (XTEX). DVN will control more than 70% of the general partner and hold 53% of the new MLP units. The combined MLP will own more than 7,300 miles worth of pipelines as well as 13 natural gas processing plants. This provides a much bigger asset base for DVN to work with.

DVN Is Ripe For Investment

Ultimately, these moves are great for Devon’s current and future shareholders.

Even though it paid a lot for it new oily acreage, DVN will now have a prime spot in one of the most important energy producing regions in the country — something it was severely lacking. After selling its non-core natural gas fields and adding the Eagle Ford assets, the E&P firm will hold acreage in five core areas — including the Permian basin, the Barnett Shale, and the Anadarko basin.

With oil prices continuing to be high and the potential for exports on the horizon, Devon will now be ready to take advantage.

At the same time, the pipeline deal with XTEX will allow Devon to buy up additional oil assets and “drop-down” the field’s gathering/pipeline assets into the new MLP subsidiary. That will help offset the purchase price of the fields while providing plenty of incentive distributions and dividends from its ownership of the general partner and the MLP shares it controls … all while avoiding taxes. That will help strengthen DVN’s cash flows, which will be already enhanced from high oil prices.

These factors should help move Devon back into a top spot into the energy sector.

Meanwhile, after years of underperformance, DVN shares are pretty darn cheap when compared to its “oily” peers. Devon is currently only trading at forward P/E of around 12. Eagle Ford rival EOG Resources (EOG) trades for a forward P/E of 19, while Bakken superstar Continental (CLR) is trading at 16x future earnings. Given similar multiples, analysts estimate that Devon should be trading in the $75 to $80 per share range.

What’s more striking is that those future earnings estimates for DVN aren’t taking into account the new shift towards shale oil and neither of its two shale oil peers have anywhere the size of Devon’s midstream assets.

Given its prospects, DVN could be one of the best blends of growth and value in the energy sector. Investors should snatch up shares before it’s too late.

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

Article printed from InvestorPlace Media,

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