On Nov 22, we maintained our Neutral recommendation on the independent oil & gas operator, Devon Energy Corporation (DVN). Devon Energy currently has a Zacks Rank #3 (Hold).
Why the Reiteration?
Devon Energy’s earnings in the third quarter exceeded the Zacks Consensus Estimate and year-ago results, primarily due to higher production and better realized prices of the product sold.
Devon Energy is presently more focused on oil and liquid generation, which are its highest margin products. The company decided to acquire GeoSouthern Energy to enhance its footprint in the Eagle Ford shale. The GeoSouthern Energy assets, located in a high reserve content region of the shale, will boost the reserve and production capability of the company.
The company has also decided to form a midstream MLP business along with Crosstex. The emphasis on the development of midstream assets appears to be a smart move, given the current oil and natural gas production boom in the U.S.
The prices of oil and gas are however tied to macro and other political factors, and can be pretty volatile. Any unfavorable movement in the market price and a decline in the realized prices will affect the revenue and earnings streams of the company.
In addition, Devon’s operations are subject to numerous U.S. and Canadian rules and regulations. Changes and modification to public policies can affect the operations of the company. The compliance with these provisions and adherence to any change in the policies would increase operating costs and constrain margins.
Other Stocks to Consider
Stocks in the oil and gas sector that are currently performing well include SM Energy Company (SM), Matador Resources Company (MTDR) and Bonanza Creek Energy, Inc. (BCEI). All these companies carry a Zacks #1 Rank (Strong Buy).