Devon Energy Looks Attractive if You Look Past the Headlines

August 04, 2022 at 06:05 AM EDT

Devon Energy (NYSE: DVN) may be an overlooked company in the oil and gas sector. However, that may change after the company releases earnings this week. The $5.63 billion in revenue beat expectations by 18%. And on the bottom line, the news was equally impressive, with the company posting $2.59 earnings per share (EPS) which was 8% higher than the forecast for $2.38 EPS.

The macroeconomic outlook works in this oil and gas stock’s favor

In this article, we’ll look at why there are some very sound reasons to invest in DVN stock. However, it’s also important to make sure you can separate the long-term outlook from what could be some short-term headwinds.

Oil Prices May be Under Short-Term Pressure

As I write this article, news has come out that Saudi Arabia is agreeing to increase oil output by 100,000 barrels a day starting in September. And that comes on the heels of the unexpected rise in domestic stockpiles of U.S. oil.

Taken together, it paints a picture of rising supply and falling demand. And like clockwork, oil stocks are falling on the news. In mid-day trading on August 3, Devon Energy is down over 5%. Chevron (NYSE: CVX) is down 2.75%, and Occidental Petroleum (NYSE: OXY) is down 4.20%. Those losses are taking a little shine off the blow-out earnings that oil companies are reporting.

Heads You Win, Tails They Lose

The mid-to-long-term outlook still looks bullish for traditional oil and gas stocks. And it’s because right now, oil prices are almost certain to rise. Companies such as Devon Energy are being asked to make the necessary investments to increase domestic oil production.

However, it’s unclear whether oil companies will cooperate. For its part, in June Devon Energy issued guidance for a slight increase in capital spending (from $1.9 billion to $2.2 billion) and a slight decrease in production (from 611,000 barrels to a range between 570,000-600,000).

As The Wall Street Journal summarized, Devon along with other oil companies believe it’s in their best interest to reward shareholders. The perception being that the Biden administration will resume its campaign against fossil fuels as soon as the current energy crisis abates.

Of course, that sets up an interesting dynamic for the mid-term elections and beyond. If the Democrats lose control of Congress, it could be favorable for companies like Devon Energy.

And even if that doesn’t occur, or gridlock prevents any meaningful reform, the company is still likely to benefit from the simple fact that building a renewable energy infrastructure will require fossil fuels.

Another Impressive Financial Performance

I borrowed that headline from page 6 of the company’s recent report to shareholders. Because, quite frankly, it’s true. Many companies are guilty of hyperbole, but there is a lot to like in the company’s balance sheet. A few noteworthy items include:

Core earnings per share were up 38%
Operating cash flow was up 46%
Free cash flow increased 62%

The company is also now forecasting full-year free cash flow to come in at $6.2 billion after previously guiding for $5 billion. And that free cash flow will easily help to sustain the company’s juicy dividend, which currently pays out $5.08 per share annually and has a dividend yield of nearly 9% (8.88%). The company has increased the dividend in each of the last five years and has paid a dividend for the last 30 years.

Analysts Continue to Like DVN Stock

MarketBeat contributor Thomas Hughes listed Devon Energy as one of his NYSE: DVN">second half stocks to watch. He did so because the company was receiving several price target increases. Since Hughes wrote that article, some analysts have lowered their price target for DVN stock, but importantly, they haven’t changed their overall rating.

And the consensus price target of the analysts tracked by MarketBeat is $76.24, which is a 33% upside from the stock’s current level.