Devon Energy: Buy This Deep Correction
Seeking Alpha: Stock Market Analysis / 2023-02-19 15:0526

anilakkus

The Market's Gift After DVN's FQ4'22 Earnings Call
Devon Energy Corporation (NYSE:DVN) recently announced its FQ4'22 earnings call, with a minimal EPS miss by -$0.09 and a lower fixed plus variable dividend of $0.89, against the previous $1.35. While we had expected lower numbers attributed to the normalization of oil/gas prices thus far, it appears Mr. Market overreacted, punishing the stock with a drastic -12.8% plunge in the days after.

Perhaps the gloom could also be attributed to the lower than expected guidance for FQ1'23 production volume of 635K Barrels of Oil Equivalent per day (BOE/D), against consensus estimates of 657K BOE/D and FQ4'22 performance of 636K BOE/D. However, we must also highlight that the lower than expected guidance was attributed to a fire incident in one of its compressor stations in Delaware, which will likely result in significant infrastructure downtime for repairs through FQ1'23.

Naturally, Mr. Market's concern for FQ1'23 output was justifiable in our view, since the bolt-on acquisitions of Williston and Eagle Ford in 2022 were expected to collectively contribute an additional 60K BOE/D. However, things might pick up from FQ2'23 onwards, due to DVN's FY2023 guidance of between 643K and 663K BOE/D, against the FY2022 levels of 610K BOE/D.

On the other hand, the management guided a relatively higher forward break-even rate of $40 WTI oil prices, compared to FY2022 levels of $30. While this was attributed to the persistent inflationary pain triggering higher contractual refresh rates by late 2022, we might see a notable bottom-line impact in FY2023.

In addition, investors might also experience potential FY2023 dividend headwinds, attributed to the higher than expected capital expenditure guidance of between $3.6B and $3.8B in FY2023. The number indicated a tremendous increase of up to 49.6% YoY from FY2022 levels of $2.54B.

The pessimistic market sentiment was especially worsened by the drastic normalization in WTI crude oil/ natural gas prices by -35.2%/ -75.5% to $77.67 per barrel and $2.38 per MMBtu at the time of writing, against hyper-pandemic levels of $119.81 and $9.73, respectively.

Therefore, while DVN delivered a record high Free Cash Flow of $6B in FY2022, it appears that this feat might not be repeated moving forward, with market analysts already expecting a normalized generation of $4.01B in FY2023 and $3.73B in FY2024.

Nonetheless, while its long-term debts of $6.18B by FQ4'22 may seem elevated, investors must also note that only $714M will be due over the next two years. Combined with the cash and equivalents of $1.45B by the latest quarter and excellent shareholder returns with $5.17B of total dividends paid out/$804M in shares repurchased in 2022, we think the dividend headwinds may not be as severe as feared.

With the company prioritizing its fixed plus variable dividends, we may see a consistent fixed quarterly dividend of $0.20 through 2023, with variable dividends potentially adding another ~$2.00 for the whole fiscal year. This is based on debt repayment of $242M and share repurchases of $700M in 2023, fully executing its $2B program expiring by May 2023.

Barring another share-repurchase authorization, those numbers suggest an annualized total dividend of $2.80 in 2023, triggering an improved forward dividend yield of 5.02% based on current stock prices, against its 4Y average of 4.03% and sector median of 4.29%.

While our projection may be comparatively lower than FY2022 levels of $5.17, it is already a notable expansion from FY2021 levels of $1.97. Investors must also note that the oil/gas industry is highly cyclical anyway, which explains the fluctuation in the company's quarterly payouts, attributed to the fixed plus variable dividend policy.

Therefore, we believe investors looking for stable dividends payouts should avoid DVN and take a look at Chevron (NYSE:CVX) or Exxon Mobil (NYSE:XOM) instead.

So, Is DVN Stock A Buy, Sell, or Hold?
DVN 1Y EV/Revenue and P/E Valuations


S&P Capital IQ

DVN is currently trading at an EV/NTM Revenue of 2.39x and NTM P/E of 8.36x, lower (on a P/E basis) than its 3Y pre-pandemic mean of 2.21x and 18.08x, respectively. Otherwise, it is relatively higher than its 1Y P/E mean of 7.49x.

Based on its projected FY2023 EPS of $7.53 and current P/E valuations, we are looking at a moderate price target of $62.95, relatively lower that consensus estimate's target of $74. Even so, there is a notable 12.9% upside potential from current levels in our view.

DVN 1Y Stock Price


Trading View

In addition, with DVN already plunging drastically since the unsatisfactory FQ4'22 earnings call, we may see more stock weakness ahead, testing the previous July 2022 bottom in the low $50s. Assuming so, investors may consider adding then, due to the improved margin of safety to our price target. Those levels would also improve its forward dividend yield to 5.5% as well.

Recovery may also come earlier than expected over the next few quarters, with the US SPR stockpile already declining to 1983 lows at 371.57M as of February 10, 2023. Notably, these levels indicate a tremendous fall by -37.4% from December 2021 levels of 593.68M and by -41.7% from FY2020 levels of 638.05M.

The SPR stockpile will probably need to be replenished sooner rather than later with the country's energy security potentially at stake. In that case, we may see the recovery of WTI crude oil prices toward the mid $90s, further aided by OPEC and Russia's reduced output through 2023. We believe this correction presents an excellent opportunity for investors to dollar cost average accordingly, while partaking in DVN's more than decent dividend payouts moving forward.

Naturally, it is important for investors to proceed with caution since this stock remains volatile in the foreseeable future, and is only suitable for those with a higher risk tolerance.

Enviado do meu Galaxy