Argus Research maintains a Buy recommendation on Devon Energy Corporation (NYSE: DVN), setting a target price of $71. Despite recent price fluctuations, Argus sees value in Devon’s strategic acquisitions, low-cost production profile, and shareholder returns program. Following the acquisition of Grayson Mill Energy, Devon has revised its 2024 production forecast upwards, highlighting significant expansion potential in U.S. oil-rich basins. The company’s cost management and robust balance sheet reinforce its growth outlook. Investors are advised to consider these factors, alongside macroeconomic and commodity price risks, in evaluating Devon’s long-term potential.

Third-Quarter Earnings: Strong Production, Lower Profit Due to Commodity Prices

Revenue and Profit Overview
Devon Energy reported Q3 2024 adjusted net income of $683 million ($1.10 per share), down from $1.058 billion ($1.65 per share) in Q3 2023, primarily due to lower realized prices for oil and natural gas. However, revenue rose 5% to $4.024 billion, exceeding the consensus forecast of $3.75 billion, supported by Devon’s production growth.

Increased Production Levels
Total production reached 728,000 BOE per day in Q3, a 10% year-over-year increase, driven by efficiency improvements and newly acquired assets. Devon’s oil production specifically grew to 335,000 BOE per day, marking a 4% increase compared to Q3 2023. The company brought 55 new wells online during the quarter, boosting overall output.

Acquisition of Grayson Mill Energy: Strategic Expansion in Williston Basin

Enhanced Production Capacity
The recently acquired Grayson Mill Energy assets are projected to add 100,000 BOE per day to Devon’s output by 2025. This acquisition extends Devon’s footprint in the Williston Basin, bringing the total production in the region to 150,000 BOE per day. The transaction also secures high-margin production opportunities, benefiting Devon’s cost structure and long-term growth.

Long-Term Growth and Inventory Expansion
Grayson Mill’s assets include 307,000 net acres with around 200 refracturing sites, extending Devon’s inventory for a decade. Argus anticipates that Devon’s efficient production methods and expanded resource base will continue to enhance its competitive positioning in U.S. shale oil.

Financial Health: Strong Balance Sheet and Shareholder Returns

Debt Reduction and Cash Flow
Devon’s financial health rating remains at Medium, with a debt-to-capital ratio of 33.6%. Total debt has decreased from $6.734 billion in Q3 2023 to $6.445 billion in Q3 2024, reflecting the company’s focus on deleveraging. Devon aims to allocate 30% of its free cash flow toward debt reduction, targeting an additional $2.5 billion reduction over the next two years.

Consistent Shareholder Returns
Since launching its buyback program in 2021, Devon has repurchased $3 billion of common stock, including $295 million in Q3 2024. Devon’s fixed dividend remains at $0.88 annually, yielding around 3.7%, though the company temporarily suspended its variable dividend due to price volatility and leverage concerns.

Upgraded 2024 Production Forecast and Capital Spending

Increased Production Outlook
Devon has revised its 2024 production forecast to 811,000-830,000 BOE per day, up from 677,000-688,000 BOE per day, thanks to better-than-expected results and the integration of Grayson Mill assets. This upward adjustment emphasizes the company’s capacity for growth even amid fluctuating commodity prices.

Controlled Capital Expenditure
Capital spending is expected to remain between $3.3 billion and $3.6 billion for 2024, a 10% reduction from 2023 levels. Argus views Devon’s disciplined approach to capital expenditures as essential in maintaining flexibility in a volatile energy market.

Valuation and Target Price

Attractive Valuation Relative to Peers
Devon’s shares currently trade at 7.1 times the 2024 EPS estimate and 6.3 times the 2025 EPS forecast, below its historical range and the peer average. Argus assigns a target price of $71, citing Devon’s competitive cost profile, improved production capacity, and expansion potential through strategic acquisitions.

Comparative Metrics
Devon’s valuation metrics — including a price-to-book multiple of 1.7 and a price-to-sales multiple of 1.65 — position it favorably compared to peers. The stock’s discount to historical and sector valuations offers an appealing entry point for investors seeking exposure to U.S. shale production.

Investment Risks and Considerations

Exposure to Commodity Price Volatility
Devon’s earnings are highly dependent on oil and gas prices. Significant price swings could impact revenue, profit margins, and free cash flow. While Devon maintains low production costs, prolonged declines in commodity prices may affect shareholder returns and capex plans.

Regulatory and Environmental Risks
As an energy producer, Devon faces regulatory challenges related to environmental standards and emissions. Changes in policy or enforcement could impact operational costs and profitability.

Conclusion and Investor Recommendation
Argus’s Buy recommendation for Devon Energy, with a target price of $71, underscores confidence in the company’s robust financial health, disciplined capital allocation, and promising growth trajectory. With a strategic focus on U.S. shale assets, Devon is well-positioned for sustained production growth and shareholder value creation.