Devon Energy (DVN) is an American producer of oil, natural gas, and liquified natural gas. The stock has been one of the S&P 500’s success stories in 2021, with year-to-date gains of more than 170%.
Many may be thinking about cashing in the recent profits they’ve made on energy stocks as commodity prices are starting to find calm amid government intervention, which is a fair rationale.
However, Devon Energy still has a lot in store and may extend its run beyond the systemic upturn in the energy sector. I am bullish on the stock. (See today’s best-performing stocks on TipRanks)
Hitting Peak Production in Permian Basin
Roughly 80% of Devon Energy’s budget is allocated toward operations in the Permian basin, where it produces oil and natural gas products.
The Permian is set to reach a near-record oil production next month, with 4.95 million barrels a day being the estimate. Lower breakeven costs have stimulated the rise in output, and Devon Energy will likely benefit from continued high-profit margin spreads.
Attractive Dividends
The key reason why I think the stock will outlast its peers in the current energy bull run is because of the company’s attractive dividend prospects.
Devon Energy has pivoted in its strategy where it’s claimed that aggressive exploration re-investment is a thing of the past. The company will be focusing on rewarding its loyal investors with lucrative dividends instead.
As things stand, Devon Energy has a forward dividend yield of 8.2% while utilizing 87.1% less of its dividend payout capacity versus its five-year average.
Furthermore, the firm’s operating cash flows remain impressive at 101.6% above its five-year average, and its cash per share exceeds the industry average by an astonishing 1,514.8%. Combining these two data points tells us that the company’s not precisely straining itself by paying its current level of dividends.
Forward Valuation
Analysts anticipate the stock’s diluted EPS to expand by another 54.4% over the coming year. If we multiply the anticipated EPS of $5.26 with the current P/E ratio of 20, it brings us to a justified forward P/E price target of $105.2, which is worth an additional value upside of approximately 142%.
Wall Street’s Take
Turning to Wall Street, Devon Energy has a Strong Buy consensus rating based on 16 Buys and three Holds assigned in the past three months. The average Devon Energy price target of $50.95 implies 17.6% upside potential.
The latest analyst who covered Devon Energy is Devin McDermott of Morgan Stanley (MS). McDermott assigned a buy rating with a $52 price target.
Concluding Thoughts
Devon Energy is still an attractive buy. Many investors will be chasing the stock’s high dividend yield amid a change in company shareholder policy.
In addition, a sharp upturn in Permian basin production could assist operating cash flows even further, subsequently leading to a higher intrinsic stock value and more fuel for dividend payouts.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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