Devon Energy Corp (DVN) Stock's Prospects Look Bright for 2016 …
The year 2015 has been a tough one for oil and gas majors. The crude oil price dip that started in 2014, continued the trend in 2015. The robust supply by the Organization of Petroleum Exporting Countries (OPEC) along with weak demand kept the prices depressed. Crude oil futures fell further during Asian trading on Wednesday. The US benchmark for crude oil, West Texas Intermediate (WTI) was down 1.42% at $35.46 per barrel, while the global benchmark for crude oil, Brent Crude was down 4.19% at $35.66 per barrel. Surviving in a depressed environment has been a challenge for oil and gas majors. Analysts at the start of 2015 had predicted a rebound in crude oil prices, but all expectations turned out to be wrong. Now with Iran stepping in the market and China s economic growth shrinking, a near-term rebound in crude oil prices isn t on the cards any time soon.
Devon Energy Corp (NYSE:DVN) is considered an attractive energy stock to buy in the current downturn. RBC, in a report research report published in late December, highlighted that the stocks with high quality assets, cheap valuation and good asset quality will outperform their peers. Devon along with other notable names, Continental Resources and ConocoPhillips, made that list of high quality energy stocks.
Devon Energy s enterprise value (EV) to best earnings before interest, tax, depreciation, and amortization (EBITDA) currently trades at 7.51x, while the energy exploration and production industry EV/EBITDA trades at 7.19x. Devon s EV/EBITDA ratio trades at a premium of 4.5% compared to the industry and is in line with its historical one-year EV/EBITDA.
The company has done quite well when it comes to production. Despite the depressed crude environment, Devon in 3QFY15 reported oil production of 282,000 barrels of oil equivalent per day. The production represented a 31% increase when compared to the same quarter last year. Devon also managed to beat production guidance for the fifth consecutive quarter. Devon, in its earnings press release, attributes the robust production levels to US resource plays. The most notable US production areas included the Eagle Ford, Delaware and Rockies Assets. Devon s Eagle Ford, Delaware Basin and Rockies Assets daily production amounted to 113,000 (43% year-over-year increase), 61,000 (32% year-over-year increase) and 16,000 (61% year-over-year increase), respectively. In addition to the strong production results reported by the company in the third quarter, it has also provided an optimistic oil production outlook. The company s 2015 oil production growth is expected to be around 31-33%.
Devon announced in December that it was going to expand operations in the Powder River Basin in Wyoming and the Stack Region in Oklahoma.
Net Income Margins And Free Cash Flows
As shown in the table above, the gross and net profit margins for Devon energy have declined sharply in the last year. Depressed crude oil prices can be blamed for the decline in net and gross margins. However, one thing that needs to be looked upon, is the improvement in gross and net profit margins compared with the preceding quarters. Another positive to look out for is the company s free cash flow (FCF) position. The FCF, which mostly remained in the red in the last year, showed improvements in the latest quarter as the company reported $360 million in FCF.
Out of the 34 analysts covering the Devon Energy stock, 26 rate it a Buy, eight a Hold and one a Sell. The 12-month price estimate for the stock comes in at $53 with a 61.4% return potential. The large number of buys and a decent upside potential indicate that sell-side analysts are highly bullish on the stock. Devon s stock closed down 1.58% at $32.83 on Tuesday.