Devon Energy Corporation (NYSE: DVN) had already seen its shares more than double from its plunge-depth lows seen during the selling panic in March. Its shares rose another 7% on Wednesday after earnings, despite posting a loss. On top of a special dividend and a capital return plan, Devon had a key analyst effectively say that they stock is 50% undervalued with a price target that offers even more implied upside than that.
Doug Leggate of BofA Securities has reiterated his Buy rating on Devon Energy and the analyst raised his price objective to $21 from $18. Investors should take note that many of the analyst observations are based upon transactions already in progress but with the big benefits largely being seen in late 2020 and over the course of 2021.
The BofA analyst noted that a headline earnings beat is inconsequential to the strategic shift presented by the company’s management. His take is that management is directly answering the challenge of presenting a transparent business model against the broader market. Leggate’s note called Devon out as having a reset strategy to pursue its oil production by no more than 5%, while also having the capital necessary to maintain production.
24/7 Wall St. covers many analyst calls. This call or any other analyst call comes with the same warning. That is that investors should never use a single analyst call, no matter how bullish or bearish they are, as a sole basis to buy or sell a stock. That said, Devon has been featured during the selling malaise within 7 oil companies hedged at much higher oil prices.
With a lower growth rate and with a target of lower expenses, Devon Energy is also immediately taking steps to lower its debt with cash on hand and will share any windfall cash flow with investors. Leggate’s view, which other exploration and production companies should be looking at — “We believe Devon is showing the market what the E&P business model can be.”
Devon’s adjusted earnings of -$0.18 per share was better than the BofA estimate of -$0.28 EPS and better than the -$0.27 EPS consensus. The company’s cash flow of $249 million was better than consensus estimates of $228 million.
After backing out capital spending and dividends, Devon’s cash position of $1.7 billion in enviable as its production came in near the high end of its guidance. Devon’s Barnett assets sale was also moved up to October versus previous guidance from December.
Devon noted that $100 million from its sale proceeds will be distributed to investors. This will be a special dividend of $0.26 per share. The rest of the proceeds will be used along with its cash on hand to repay $1.5 billion of its outstanding debt.
As for BofA’s value dislocation, Leggate believes that Devon has taken the difficult models of other oil companies and made its valuation to where it can be easily compared with any other sector. This is where the 50% undervaluation target at $50 oil prices. At $45 oil, Devon’s free cash yield is 10% and that goes up to about 20% (FCF yield) at $55 oil.
BofA’s investment rationale points out that Devon has one of strongest balance sheets in the sector, pending completion of asset sales in the Barnett play and a commodity risk profile that is now muted with 80% of its oil production hedged in 2020. The firm also sees Devon being favorably positioned to weather the cycle on a relative basis to other exploration and production outfits.
Devon’s new output target gave cover for Leggate to raise his $18 price objective to $21, versus a prior $11.09 closing price. With Devon shares up almost 7% at $11.83 on Wednesday, this implies an upside of 75% if the analyst’s views are proven to be correct.
In a rival analyst call, Credit Suisse’s post-earnings research note comes with an Outperform rating and a $15 price target. The firm’s so-called “Blue Sky Scenario” would include oil being $10 above the forecasts taking the stock to a $27 valuation versus a $9.00 valuation on its “Grey Sky Scenario.” Credit Suisse now sees Devon having a much lower 2021 maintenance capital spending need along with a higher cash flow of roughly $300 million higher. Devon Energy shares had also been upgraded by Piper Sandler with an Outperform rating a $15 target just two weeks earlier.
Wednesday’s news and views by the company may now also make Devon be eligible for the next review of the 10 oil companies that will still thrive in 2030.
Devon’s 52-week trading range is $4.70 to $28.42, with a $4.5 billion market cap and a Refinitiv consensus analyst target price of $15.64.