Shares of Devon Energy (DVN) have skyrocketed in the past year as they rose more than 164% and outperformed the best oil stocks by far.
Based on indications on future supply and demand, fossil fuel prices are expected to rise in the coming months. Higher prices are like bread for Devon Energy and other energy companies. Aided by solid fundamentals, Devon is positioned to outperform most competitors. Therefore, I’m bullish on this stock.
Devon Energy Corporation explores hydrocarbon assets in the United States, producing oil, natural gas, and natural gas liquids. The company is also a mineral asset developer and currently operates approximately 3,942 gross wells.
Q3 2021 Earnings Results
In the third quarter of 2021, the company posted an adjusted net income of $1.08 per share, ahead of analysts’ expectations averaging $0.93 per share. The difference gave the stock price some strength in the week following the release of the results.
In terms of total revenue, $3.47 billion was earned in the period for an increase of 224.3% year-over-year, surpassing projections by $1.1 billion.
The company generated a total of $1.1 billion in free cash flows, an eight-fold increase compared to the last quarter of 2020.
The balance sheet is solid. It had $2.1 billion in cash on hand as of September 30. However, despite a much higher total debt of $6.8 billion, the company should really be the type that can easily handle interest expense, as evidenced by an interest coverage ratio of 9.75.
From the production standpoint, year-over-year, the oil output increased 110% to 303,000 barrels per day, natural gas liquids increased 78% to 148,000 barrels per day, and gas production increased 63% to 943 million cubic feet per day. Realized total oil equivalent price rose 76.5% to $40.48 a barrel.
Realized price increases (including cash settlements) were 51% for oil to $57.59 per barrel, 155.4% for natural gas liquids to $30.80 barrel, 80% for gas to $2.77 per thousand cubic feet. The realized price for total oil equivalent rose 76.5% to $40.48 a barrel.
Oil and Gas Price Outlook
The pandemic and the geopolitical situation in the world provide a favorable framework for further increases in oil and gas prices.
The economic recovery is driving a strong increase in demand for fossil fuels. The Omicron infection, which marks another wave of lockdowns and restrictions to contain its spread, has caused economists to slightly lower their forecasts for the recovery.
The continuation of the vaccination campaign, the adaptation of the vaccines to the new variant, and the development of therapies to prevent the serious illness will allow the phasing out of all anti-COVID-19 measures and allow a return to normality.
The full reopening of operations, including intercontinental air traffic, will increase the demand for oil and gas. Since crude oil-producing countries and Russia (gas) are reluctant to increase the supply of oil and gas on the market, this situation will ultimately put further upward pressure on the price of fossil fuels. Obviously, Devon Energy and other operators will benefit from this.
Wall Street’s Take
In the past three months, 18 Wall Street analysts have issued a 12-month price target for DVN. The company has a Strong Buy consensus rating, based on 14 Buys and four Holds assigned in the past three months.
The average Devon Energy price target is $53.61, implying 12.3% upside potential.
Conclusion
The pandemic and the geopolitical situation in the world provide a favorable framework for further increases in oil and gas prices. Devon and other operators depend on the prices of these resources.
The faster these prices rise, the better for earnings, a strong catalyst for higher stock prices. So, energy stocks, including Devon, are poised for continued price gains. These catalysts may also lead to the company increasing its dividend.
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