Tuesday, May 1, 2012

Natural Gas: "Devon Energy: Undervalued, Underrated" (DVN)

This month we will be looking at some of the classier Exploration&Production companies.
Unless you have a five year timeframe it is still too early to make major commitments but we will be referring back to these commentaries later this year.
The stock close at $69.85 on Monday.
From Barron's last week's feature:

Pessimism is too high and the share price is too low for the big driller, whose sound strategy, strong balance sheet and shrewd joint ventures should pay off nicely.
 Investors can be forgiven for being wary of oil stocks, given that crude prices already are up 35% since October. Yet Devon Energy

Nearly two-thirds of Devon's recent output was natural gas, whose price is at a decade low, so shares of the Oklahoma City-based giant haven't levitated as much as those of some of its peers. Wall Street also hasn't given Devon (ticker: DVN) much credit for its continuing transformation to a North American powerhouse in onshore drilling: The company has shed offshore assets, raising enough money to spend $3.5 billion to repurchase 11% of its shares outstanding, whittle its net debt, and still have $7.1 billion of cash. But investors worry that Devon might make rash acquisitions.

At a meeting this month, CEO John Richels assured analysts that management isn't hatching a big dilutive deal, and instead outlined a comprehensive plan to spend more on drilling for oil and higher-margin natural-gas liquids in the U.S. and Canada. By management's typically modest estimates, this could expand Devon's annual output of oil by 19% and of natural-gas liquids by 13%, so that by 2016 less-profitable natural gas will account for half or less of Devon's production. Yet investors seem more preoccupied by a projected $1 billion increase to the exploration budget for 2012, to a range of $6.1 billion to $6.5 billion....MORE

Wall Street Wallflower

The company trades at a discount to its peers, despite having less debt, a better dividend, and stronger earnings prospects than most.
Company/Ticker Recent
EV/ Ebitda Div Yld Net Debt/ Tot Capital
Devon /DVN $65.91$6.19$7.1210.73.91.2%15%
Chesapeake /CHK 18.001.572.8311.55.01.938
Anadarko /APC
Denbury /DNR 18.001.681.7810.76.70.036
Marathon /MRO 29.413.694.388.02.82.320
Apache /APA 92.1112.6814.
Noble /NBL 93.736.138.3515.37.90.927
E=Estimate Source: Thomson Reuter