Could this cheap energy stock with a 7% dividend yield be the right fit for your portfolio?
Devon Energy continues to take advantage of higher oil prices.
-Delaware Basin production continued to outpace production for the quarter.
-Operating cash flow increased 14% to $1.8 billion and free cash flow increased to $1.3 billion.
-With earnings per share coming in at $1.48 per share, net income came in at $1 billion.
Devon Energy (NYSE:DVN) Consistently seeing strong results as energy prices continue to provide tailwinds to the company. Devon is an energy company primarily engaged in hydrocarbon exploration in the United States. They currently have 1600-1800 million (barrel oil equivalent) BOE of oil compromising petroleum, natural gas and natural gas liquids.
energy outlook
Oil and natural gas prices remain high, with the latest price, WTI, trading at $122 a barrel. On the other hand, natural gas prices are currently trading at $8.60 per MBtu. Both of these prices should remain higher as demand will outpace supply over the next few quarters, with analysts expecting the oil price to rise to as high as $140 a barrel. This bodes well for Devon Energy and its stock.
Exploration costs and fewer barrels of oil being discovered have created an environment where oil supplies remain tight; As a result, global oil prices have formed a complex bottom and are likely to remain above it in the future. Furthermore, beyond exploration issues, OPEC has indicated it does not want to increase supplies, and other major oil producing countries are agreeing to the bloc. All of these factors will continue to provide tailwinds to oil in the near future, which should create a long-term favorable environment for oil stocks.
(advertisement)
Which is the highest yielding stock you have ever owned? The dividends of these stocks have grown so fast over the years that they are now paying us an average of 26%!
When you start paying 26% on your money, your financial problems are largely gone.
Financial Outlook
Despite the favorable background, Devon’s management has indicated that it will continue to perform operations as planned. Production plans are expected to be anywhere from 570,000 to 600,000 BOE, with capital expenditures coming in at around $2 billion.
Revenue for the year is expected to come in at around $18 billion, but if energy prices remain high, that number could rise to $20-22 billion for the year, providing a substantial increase in cash flow. Current operating margin for Devon Energy is expected to be approximately 30-35%, and net income margin is expected to come in at approximately 25%. That would translate into a net profit of about $4.5-5 billion for the year, giving a price-to-earnings (P/E) of about 10 times, and at that valuation, the stock could be considered relatively cheap. In addition, one-time operating costs increased by approximately $7 a barrel last quarter, and those costs should no longer exist in the coming quarters, leading to increased operating profit over the next few quarters.
On top of a great valuation, the company continues to deliver a high dividend yield of 7.5%. So, even if cash flows were significantly reduced, and dividends were cut, valuations would still be cheaper.
Based on the DCF, the stock is currently valued at $120, and even if the price of oil falls, a significant margin of safety remains for the stock, which helps to calm the nerves of investors who are prone to volatility. are concerned about.
Management Outlook
Management continues to focus on maintaining operational efficiency and discipline. They continue to emphasize that oil prices are volatile and are determined not to spend more on capital to increase production. In addition, management is focused on bringing net debt down to 0 by the end of the year by retiring debt due on earlier timelines in 2022 and 2023. He has also said that as cash flows increase, the return on capital employed should rise to 40% this year, which will help propel the stock price further.
Stocks can have an adverse economic impact
Oil prices continue to rise as global demand remains strong. But consumers are increasingly struggling as inflation takes a toll on purchasing power. In addition to inflation, rising interest rates will hit the economy, and due to lower consumption and investment, aggregate energy demand should fall below 2021. Both these factors are likely to put pressure on oil prices. In addition, supplies from countries such as Venezuela could also affect oil prices, with oil prices falling below $100 a barrel.
And as the Fed tightens, higher rates and quantitative tightening are likely to reduce overall liquidity in the market. All these factors are headwinds and should be considered before investing. Historically, shale-oil stocks have always been volatile, and while balance sheets are much more stable than they used to be, liquidity risk has always been an issue.
Note: Analysts continue to increase the price target for this stock, with Barclay’s being the latest bank to raise its target to $90 per share.
Should You Invest $1,000 in Devon Energy Now?
Before you consider Devon Energy, you might want to hear this.
MarketBeat tracks Wall Street’s top-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified five stocks that top analysts have been quietly whispering to their clients to buy before the broader market took hold… and Devon Energy was not on the list.
While Devon Energy currently has a “buy” rating among analysts, the top-rated analysts believe these five stocks to be the better buy.
View 5 Stocks Here
Companies mentioned in this article
Compare These Stocks Add These Stocks to My Watchlist
