Devon Energy (DVN) shows restraint amid international crisis
By Andrew Knoll
22:41, 7 March 2022
Devon Energy (DVN) stock has gained more than 100% in the past six months, which provoked some bullish estimates for year-over-year growth and saw a premarket surge on Monday, after on Friday CEO Rick Muncrief told CNBC that the company had no plans to expand drilling and fracking operations in the face of escalating uncertainty in Russia and Ukraine.
“Our plan is our plan,” Muncrief told CNBC’s Investing Club.
Soon after the interview, CNBC personality Jim Cramer made an unequivocal recommendation: “Own Devon Energy — that’s your insurance policy against continued geopolitical chaos.”
Indeed the clash in Ukraine and the West’s growing isolation of Russia have impacted the energy sector profoundly, as Esplanade Capital’s Chief Investment Officer Shawn Kravetz told Capital.com in an exclusive interview.
“Climate and ESG concerns have been leading drivers over the past year or two, finally,” said Kravetz, who has monitored energy and alternatives for nearly two decades. “I acknowledge that some of them are going to, at least temporarily, take a backseat to the necessity of energy, even if it has an environmental cost. Short-term needs will overwhelm some medium and long-term risks.”
Capital.com offers a glimpse at what has made Devon a strong performer that has garnered both institutional and individual investor interest, as well as how the company is positioned in a dynamic sector within a volatile market.
Devon at a glance
One of the leading independent oil and gas companies, in a valuation range with companies like Hess and EOS Resources, Devon completed a merger of equals with WPX Energy Inc, Muncrief’s former company, as the high point of last year’s M&A activity for the company. Committed to its existing expansion plans, Devon has shown a level of restraint uncommon among operators in the US’s Permian Basin.
Rather than ramping up drilling operations, they’ve remained keyed in on free cash flow, shareholder dividends and their pre-conflict playbook. Their plans have served them well to date, with analysts consistently giving buy and overweight ratings. Even as some analysts downgraded the stock last week – in one case as a response to political pressure and some valuation concerns – target prices rose alongside overall enthusiasm from informed observers.
Devon's growth rate of nearly 75%, more than double the industry average, has helped it continue to out-perform analyst estimates. The market has also responded favourably to Devon’s conservatism when it comes to production.
“We’ve been so focussed on remaining very, very disciplined, keeping our budgeted volumes flat, operating (from) a maintenance capital standpoint,” Muncrief said on an investor relations call. “I think that’s the right answer until we get some real clear indication that it’s otherwise.”
What is your sentiment on DVN?
Oil and gas as hedges or any other sort of consistency-adding actor may seem like an unusual position given where conventional wisdom sat just a short while ago. Even ARK Invest's Cathie Wood, a major EV proponent who in 2020 boldly set a $12 target price for a barrel of crude oil that was trading as high as $126.60 on Monday, walked back her position to a degree.
The increasing prevalence of alternative energy from solar panels to electric vehicles coupled with decarbonisation pledges from entities both private and public seemed to support bearish stances like Wood’s. But disrupted supply chains, rising oil and natural gas prices, concerns about alternative energy shortfalls and imminent instability in a key resource-producing region have reversed the course of events.
“With improved performance, we expect investor apathy conflated with ESG concerns to be replaced by a what we would regard as a more rational view on the value proposition of ‘old energy,’ against a realistic pace of any energy transition and anchored on transparent valuations defined by free-cash flow and defended by outsize cash returns prioritised overgrowth,” Bank of America analyst Doug Leggate wrote in a note obtained by Business Insider.
Short-term drivers of price, long-term drivers of change
Kravetz noted that while climate and ESG concerns were one driver of the renewable energy market, there were other compelling forces as well.
“Even absent climate change, pure economics had been a driver and, most recently, the global energy crisis has been the driver. That crisis has just come to a head with the [conflict] in Ukraine,” Kravetz said. “Many of the things were happening before this – they’re not new, they’ve just accelerated and intensified – so, while the (conflict) in Ukraine, the remarkable crisis we’re in right now, has changed the calculus, the opportunity for renewable energy, while in some ways it’s gotten a bit more challenging, on net, it’s actually gotten more compelling, not less.”
The dire situation in Eastern Europe and the broader global energy squeeze have been drivers of both traditional and alternative energy, as irreconcilable as that may seem on its surface.
While Kravetz said there is little denying that present circumstances have elevated uncertainty, created an environment ripe for interest hikes that dampen the value of long-lived assets and removed some reservations about “drilling, digging, burning and polluting more,” they have opened the window even wider for renewable energy in the long haul. Skyward-trending costs of non-renewable resources could serve to create great cost parity as well.
“At the end of the day, nations around the world, in Western Europe and in the United States are desperate for power and energy in a world that is both trying to decarbonise and is electrifying. That electricity has to come from somewhere,” Kravetz said. “So, while there may be more drilling and more oil and more coal than one might have expected a year ago, there’s also going to be more renewables. So, the right renewable energy companies are going to benefit, perhaps more than ever.”
Dovetailing to come?
Even major players like Chevron and Exxon have waded into the renewable energy waters to the tune of billions of dollars. Though these companies have experienced a windfall due to the increased value of assets, demand of product and extended shelf lives of non-renewable energy, such transitions could be accelerated by soaring profits and a broader goal of energy independence from foreign actors and potential shortages alike.
“Many of the classic market leaders have started to dedicate some time, financial resources, marketing and PR muscle to renewables and the future of energy, as opposed to the history of energy,” Kravetz said. “Part of it has been because they’ve seen it as economically sensible and partly it’s been for the long-term survival of their business."
For Devon’s part, in February, it announced a partnership with Omnia Midstream to integrate renewable energy into its operations in the Delaware Basin. Overall, Devon has stayed focused on “high-impact” opportunities, its COO Clay Gaspar said on an investor relations call, and on engineering efficiency. One such example was the new design deployed on a natural gas mining operation in Oklahoma’s Anadarko Basin, where a partnership with Dow Chemical Co. generated some $550m in free cash for Devon last year.