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3 Reasons to Buy Devon Energy Stock Like There's No Tomorrow
DVNDevon Energy(DVN) The Motley Fool·2025-01-11 23:23

Core Viewpoint - Devon Energy's stock has experienced a significant decline of nearly 28% in 2024, but this sell-off may be overdone given the current oil prices and the company's strengthened business outlook [1] Group 1: Acquisition and Market Reaction - Devon Energy's 5billionacquisitionofGraysonMillEnergyhasraisedconcernsinthemarket,particularlyduetotheacquisitionofassetsinthelessproductiveBakkenregioncomparedtothemorelucrativePermianregion[2]−Themarket′sapprehensionmaystemfromthedealbeingbasedonan5 billion acquisition of Grayson Mill Energy has raised concerns in the market, particularly due to the acquisition of assets in the less productive Bakken region compared to the more lucrative Permian region [2] - The market's apprehension may stem from the deal being based on an 80 per barrel oil price, which has not been realized [2] Group 2: Financial Projections and Cash Flow - Post-acquisition projections indicate that Devon Energy could achieve a free cash flow (FCF) yield of 9% at 70perbarreloilprices,1470 per barrel oil prices, 14% at 80, and 5% at 60,basedonastockpriceofapproximately60, based on a stock price of approximately 38.30 [3] - Adjusting for the current stock price of 34.88,theFCFyieldat34.88, the FCF yield at 70 per barrel oil price would be 9.9%, indicating strong cash flow potential for shareholder returns [4] Group 3: Operational Progress - Devon has made significant operational improvements, with a 20% increase in productivity from its core Delaware Basin assets, and is targeting production volumes of 800 thousand barrels of oil equivalent per day (mboed) in 2025, up from an expected 730 mboed in 2024 [5] - The Chief Operating Officer has indicated that production from the acquired assets is expected to exceed initial expectations, with early successes in synergy targets [6] Group 4: Capital Allocation Strategy - Analysts project Devon will generate 2.78billioninFCFin2025,leadingmanagementtoprioritizesharebuybacksanddebtrepaymentovervariabledividends[7]−Thisstrategyaimstoreducedebtandinterestpaymentswhileincreasingexistingshareholders′claimsonfuturecashflows,withpotentialforfuturedividendincreases[8]Group5:StockValuationandMarketSentiment−ThedeclineinDevon′sstockmayalsobeinfluencedbythepreviousownersofGraysonMillselling2.78 billion in FCF in 2025, leading management to prioritize share buybacks and debt repayment over variable dividends [7] - This strategy aims to reduce debt and interest payments while increasing existing shareholders' claims on future cash flows, with potential for future dividend increases [8] Group 5: Stock Valuation and Market Sentiment - The decline in Devon's stock may also be influenced by the previous owners of Grayson Mill selling 1.75 billion worth of stock received in the acquisition [9] - Despite market pressures, Devon Energy's stock is viewed as a great value, with significant upside potential if oil prices remain favorable [10]