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Charles Kennedy

Charles Kennedy

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Devon Overtaken in S&P 500, but Still E&P Darling

Oklahoma-based Devon Energy may have been overtaken in the S&P 500 index by BB&T Corp. in terms of market capitalization, but for the energy sector, it is still golden days for this unique E&P company.

Devon Energy (DVN) has lost its 159th ranking on the S&P 500 to BB&T Corp. (BBT), as the index favors market capitalization and BB&T Corp. has slid past Devon, with a market cap of $23.94 billion compared to Devon’s $23.71 billion.

Things have been good for Devon’s shareholders since company went on a purge in 2010, divesting all of its offshore and international assets to focus wholeheartedly on the higher-margin, onshore US plays.

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Its key plays include the Permian Basin, the Barnett and Cana Woodford shales and Alberta’s oil sands—all lower-risk plays that have high potential for production expansion.

But it’s the Permian Basin that investors are eyeing more heartily. Here, Devon controls 1.3 million net acres and in the second quarter of this year alone boosted production 32%, with more expected when we see third and fourth quarter results.

Devon has proved reserves of approximately 3.0B Boe. For the second quarter of this year, production was at 698 million barrels of oil equivalent per day, with a mix of 24% oil, 18% natural gas liquids (NGLs), and 58% natural gas. It has a significant midstream business that is expected to have a FY2013 operating profit of about $475 million.

While it is important to look at market capitalization, it is also worth noting that these stocks are nicely undervalued. With an enterprise value of only about $30 billion, stockholders are only paying about $10/Boe for DVN's reserves.

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According to Goldman Sachs, Devon is one of the 40 most undervalued stocks, coming in at No. 8.

And there are plenty indicators of more growth ahead. The company is expected to soon announce a spin-off of its US midstream assets, and oil production continues to grow rapidly, with the focus on oil and liquids-rich projects as natural gas prices are still low.  

Beyond this, we’re looking at two new massive joint ventures for Devon—with China’s Sinopec and Sumitomo.

By. Charles Kennedy of Oilprice.com


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