Three Strong Motivations to Invest in Devon Energy Shares Without Delaying
With a staggering 28% drop in 2024, Devon Energy's (DVN -3.27%) stock took a hit. Yet, the market's pessimism might be misguided. Despite oil trading around $75 per barrel at the moment, the market seems to have forgotten that it spent most of 2024 hovering around the $70 mark. And let's not forget that Devon Energy thrived during this period, strengthening its business. Here's why you might want to consider this undervalued gem.
An Attractive Oil and Gas Stock
Devon's acquisition of Grayson Mill Energy for $5 billion caused some ripples. The market seemed concerned, with the stock dropping following the early July announcement. The naysayers might point to the acquisition of substantial assets in the Williston Basin (Bakken) in North Dakota as potential issues. The Permian region's more highly-valued assets, where Devon's core Delaware Basin assets reside, have had a more successful track record in boosting oil output. Moreover, Devon used an $80 per barrel benchmark to make the deal.
But here's the catch: Devon's projections remain solid, making it an excellent value even at current prices. With the Grayson Mill deal now sealed, Devon's preliminary 2025 outlook revealed a free-cash-flow (FCF) yield of 9% at a $70 per barrel oil price, 14% at $80 a barrel, and 5% at $60 a barrel (at a then $38.30 stock price). Even accounting for the recent dip in stock price, this translates to a 9.9% FCF yield at $70 a barrel. That's a substantial yield, and the FCF will give Devon's management plenty of leeway to return cash to shareholders.
Strong Operational Progress
Devon's recent operational strides are equally compelling. Its investment in its Delaware Basin assets has improved productivity by 20%. Management now anticipates daily production volumes of 800 thousand barrels of oil equivalent per day (mboed) in 2025, up from an expected 730 mboed in 2024. The target of 800 mboed in 2025 represents a 5% increase over what was initially projected as part of the Grayson Mill deal.
In November 2024, Devon's Chief Operating Officer, Clay Gaspar, told investors that the production from the acquired assets would likely surpass initial expectations and that Devon would surpass the initial synergy targets for the deal more quickly than anticipated.
Committed Capital Allocation
Devon's commitment to smart capital allocation is worth noting. Wall Street analysts estimate $2.78 billion in FCF in 2025. Rather than using this cash influx to issue dividends, management has prioritized debt repayment and share buybacks. While this decision may disappoint some income-seeking investors, it makes long-term sense. Reducing debt decreases interest expenses, and reducing the share count increases shareholders' claims on future cash flows and dividends. Moreover, the ample cash flow leaves room for potential dividend increases.
In conclusion, Devon Energy's stock might be on sale due to concerns over its Grayson Mill acquisition and the selling of shares by private equity investors. But this stock looks like an excellent value proposition. If the oil price cooperates, Devon Energy has significant upside potential in 2025.
Given Devon Energy's strong financial performance and the acquisition of Grayson Mill Energy, investing in their stock could be a wise decision. Even with the market's pessimism and the recent drop in stock price, Devon's solid projections and high free-cash-flow yield make it an attractive investment option. With a projected 9% FCF yield at $70 a barrel, Devon's management has plenty of leeway to return cash to shareholders.
As we delve deeper into Devon's financial strategy, their commitment to smart capital allocation is noteworthy. Instead of issuing dividends, management is focusing on debt repayment and share buybacks, a move that may not please income-seeking investors in the short term but makes long-term sense by decreasing interest expenses and increasing shares' claim on future cash flows and dividends.