Devon Energy: Lucky And Good?

Todd Shriber
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We all know the old saying ''sometimes it is better to be lucky than good.'' Applicable in many walks of life, the combination of good fortune and acumen can be especially potent. That might be the case going forward with Devon Energy, one of the largest U.S. independent oil and natural gas producers. Call the company lucky, call it smart or both, but Oklahoma-based Devon made the prescient call to exit the offshore drilling business late last year.

By April 20, the day the Deepwater Horizon rig exploded in the Gulf of Mexico, that looked like a smart call. Several months later, one can say Devon may have been lucky, but the charts show the stock may be good as well. Nearly six months removed from that tragic day, Devon shares are flat in that time while BP (BP), despite a recent pop, is still down 30% and Anadarko Petroleum (APC), a direct Devon rival, is down 20%.

In what may now be viewed as an odd (or lucky) twist of fate, Devon (DVN) disposed of $7 billion worth of offshore assets in Azerbaijan, Brazil and the Gulf to BP just five weeks before the Deepwater Horizon exploded. Prior to the spill, exiting the potentially lucrative offshore drilling business may have been viewed as a foolhardy gambit. After all, onshore fields are maturing and production at many of those fields is declining the experts say. Post-spill, Devon looks brilliant.

And the onshore thing isn't so bad. When Devon delivered second-quarter results in August, the company reported in an uptick in production from its Permian Basin assets in West Texas and said that oil and gas production are growing at the Cana Shale in Oklahoma. Devon is also moving forward with projects in the oil sands region of western Canada. All onshore, all less risky than drilling at extreme depths in the Gulf or in far flung locations such as Brazil or the South China Sea.

Overall, Devon plans to spend $2 billion on shale plays this year, a move that is necessary to help offset weak natural gas prices. The natural gas issue does say that Devon isn't perfect, but the company is doing what it needs to do to increase its oil profile to take advantage of high oil prices. Noteworthy is the fact Devon is putting some of the cash it has netted through asset sales to good use. Already sitting on $1.2 billion in free cash at the end of the second quarter, the company said it would deploy some of the proceeds from the asset sales toward a $3.5 billion share buyback plan.

There are some other positive tidbits, including analysis by McDep Associates which says Devon has a debt to present value ratio of 0.08. Last month, McDep said Devon shares have an estimated net present value of $98. Obviously, there are no guarantees that Devon is headed there, but it is clear that Devon's upside will probably come without the risk and the stomach-churning action that some of the energy sector's other constituents are notorious for providing.