Devon Energy (NYSE:DVN) has been a leading oil production firm establishing a leadership position in the space. It benefited immensely from robust energy markets in the first half of the year, leading to record growth. Though a slowdown is expected in the upcoming quarters, oil prices can still remain high. Meanwhile, DVN continues to reward its shareholders through hefty dividends and buybacks. Hence, we are bullish on DVN stock for the foreseeable future.
Devon has a strong track record of delivering shareholder value, with a proven ability to generate cash flow and profits even in tough market environments. Its operation is concentrated in various onshore areas in the United States. Devon Energy has a strong presence in the Permian Basin, the Barnett Shale, and the Gulf Coast region. Additionally, Devon has a large portfolio of high-quality assets and a disciplined approach to capital allocation. This gives the company a major advantage over its competitors and positions it well for continued success in the future.
Despite the impressive gains this year, we believe DVN stock is still undervalued and has plenty of room to escalate. A rally to $100 per share in the long term seems plausible from here, with the firm producing significant free cash flows.
Interestingly, DVN stock has a ‘Perfect 10’ Smart Score, indicating high potential for the stock to outperform the market, going forward.
Strong Third-Quarter Showing
Devon Energy delivered another stellar quarter despite the dividend drop, negatively impacting investor sentiment. It was a strong showing, given the pullback in oil prices. The third quarter was the seventh straight quarter in which it beat earnings estimates. Revenues improved by roughly 57% from the prior-year period, beating estimates by $618 million. Moreover, its non-GAAP earnings per share beat estimates by six cents. Though it wasn’t the triple-digit revenue bump the firm had been experiencing in the past five quarters, the results were still impressive.
Perhaps what sparked a post-earnings sell-off in its stock was its announcement of a $1.35 dividend per share, a slight decline compared to previous quarters. Nonetheless, the firm’s dividend yield is still at an incredible 8%.
Its cash flow performance is more noteworthy, considering it recently set a record of $1.5 billion in free cash flow in its most recent quarter. Its forward free cash flow yield, based on 2022 estimates, is 14%, which indicates the company’s financial prowess. Operating cash flows shot up 32% from the same period last year to $2.1 billion. The gusher of cash flows is naturally due to higher oil prices, which should continue to positively impact the firm’s bottom line.
In recent years, Devon Energy has made a concerted effort to focus on its core strengths and build a more streamlined and efficient company. As part of this process, the company has sold off non-core assets and reinvested the proceeds into high-potential areas. Devon Energy has also been an active acquirer, spending more than $2 billion in cash on bolt-on acquisitions that have further strengthened its position. We expect the company to continue to add bolt-on acquisitions and look for other opportunities to increase performance levels.
Is DVN Stock a Buy, According to Analysts?
Turning to Wall Street, DVN stock maintains a Moderate Buy consensus rating. Out of 14 total analyst ratings, eight Buys, six Holds, and zero Sell ratings were assigned over the past three months.
The average DVN price target is $82.93, implying 21.2% upside potential. Analyst price targets range from a low of $67 per share to a high of $100 per share.
The Bottom Line on DVN Stock
Devon Energy is an industry-leading oil producer with much success in recent years. The company’s earnings depend on the price of oil, which can be very volatile and difficult to predict. However, oil prices can likely sustain themselves in the next few quarters. A large part of it is because of OPEC’s production cuts, which are expected to get even deeper in the coming months. The European region is scampering to source the majority of its energy supplies away from Russia, which is likely to come at a major cost. OPEC and its allies are likely to limit supply further amidst a faltering oil market. Hence, oil prices should remain high for the foreseeable future with a weakening supply.
Given the firm’s strong earnings performance and the outlook for higher oil prices, we expect the stock to trade over the $100 per share mark in the not-so-distant future.
Devon Energy has consistently performed well and generated a significant return for investors. The company’s strong financial performance and proven track record make it a relatively safe bet for long-term growth. Given the current inflationary environment, Devon Energy looks like an attractive option.
