Devon Energy stock: a good speculative buy after PXD buyout

on Oct 12, 2023
  • Exxon Mobil agreed to buy Pioneer Natural Resources this week.
  • PXD’s founder and CEO predicted more mergers in the sector.
  • Devon Energy seems like a good acquisition target.

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The biggest energy news of 2023 was the recent decision by ExxonMobil to buy Pioneer Natural Resources (PXD) in a $60 billion deal. This buyout could trigger additional M&A activity in the energy sector as cash-rich seek to boost their scale and shareholder returns. This view was confirmed by PXD’s CEO in the Bloomberg interview below.

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The case for Devon Energy

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The energy industry is moving from strength to strength even as governments impose electric vehicle mandates. While more people are buying EVs, oil demand is expected to rise to a record high in 2023 and 2024. As a result, analysts at JPMorgan expect Brent to soar to $150 in the coming months.

At the same time, energy companies are looking to diversify their geographical presence. Exxon bought Pioneer to gain more access to the oil-rich Permian Basin. Similarly, Devon merged with WPX for the Delaware Basin assets. There are three reasons why Devon Energy (NYSE: DVN) would be a good target.

First, Devon Energy has diversified locations, with a presence in the Delaware, Eagle Ford, Anadarko, Powder Basin, and Wellington Basin. 68% of its production is in the Delaware Basin followed by Anadarko. This means that a potential acquirer would have a good access to quality assets.

Devon Energy stock is cheap

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Second, Devon Energy is one of the cheapest energy stocks in the US. Its stock has dropped by 28% in the past 12 months, giving it a market cap of over $29.5 billion. It has lagged other upstream producers like DiamondBack Energy, Coterra Energy, and EQT Corporation.

Devon Energy trades with a PE  multiple of 6.28x, lower than other upstream producers. Its EV to EBITDA stands at 4.05 while its price to cash flow is 4.16. Pioneer, on the other hand, has a PE of 10.10 and an EV to EBITDA of 6.02. 

This performance is mostly because of the company’s production challenges it has experienced in the past few months. As a result, its revenue in Q2 dropped to $3.45 billion, a 38% decline from the same period in 2022. Devon should boost its production after completing its Delaware construction.

A potential acquirer would have a chance to improve these operations and boost returns in the long term.

Finally, Devon Energy is a cash flow machine. It has risen its FCF in the past 12 straight quarters, which has helped it reduce its debt load and return vast sums of cash to shareholders through dividends and buybacks. 

The key risk for Devon Energy is that it has a huge debt load. It has over $6.78 billion in debt, giving it a debt-to-equity ratio of 60.41%. Pioneer has just 26%. This huge debt burden could make potential buyers like Chevron, Shell, and Occidental to rethink a m

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