We reiterate our Neutral recommendation on Devon Energy Inc. (DVN). Devon Energy ranks among the leading independent oil and gas companies in the U.S. and has leverage to some of the best North American natural gas assets. However, we expect the present constrained commodity environment to continue weighing on Devon’s financial performance in the near term.
Oklahoma City-based Devon Energy is an independent energy company engaged primarily in exploration, development and production of oil and natural gas. Devon’s deep and diversified portfolio, primarily composed of unconventional resources, reflects significant long-term growth potential.
The company dedicates a considerable part of its capex budget to low-risk development projects in its vast North American assets, which provide reliable and repeatable production and reserves additions.
Furthermore, Devon’s significant exposure to emerging plays, consistent production profile and low cost structure reflect significant upside potential over the long run. Additionally, the company’s Marketing and Midstream operations, primarily located in the vicinity of its core onshore operations in the U.S. and western Canada, complement its E&P business.
Devon has shown financial discipline by prudently managing its balance sheet and living predominantly within generated cash flows. Also, the company continues to steadily progress towards the realignment of its offshore and international assets to reposition itself as a high-growth North American onshore company.
The company’s strong performance and offshore divestiture success throughout 2010 resulted in strong year-end liquidity levels. As of December 31, 2010, the company had $3.4 billion of cash and short-term investments and $2.6 billion of available credit.
Net debt-to-adjusted capitalization at year-end was 10%. At year-end, the company significantly lowered its total debt to roughly $5.6 billion and net debt to $2.2 billion, demonstrating a great deal of financial strength.
Despite these positives, we remain a little cautious due to the constrained commodity environment which will continue to weigh on Devon’s financial performance in the near term, in our view. The company, which derives a bulk of its revenues and earnings from E&P operations, has experienced a severe plunge in its top and bottom lines in recent quarters due to the challenging energy price environment.
Thus, we remain on the sidelines on Devon shares. The company retains a short term Zacks #3 Rank, in line with its closest peers BP plc (BP) and ConocoPhillips (COP).
BP PLC (BP): Free Stock Analysis Report
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DEVON ENERGY (DVN): Free Stock Analysis Report
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