Morningstar | Devon Announces Plan to Separate Canadian and Barnett Assets, Focusing on U.S. Oil Plays
We're holding steady on our $30 fair value estimate for no-moat Devon Energy following the release of the company's fourth-quarter and full-year results. Devon generated total production volumes of 532 thousand barrels of oil equivalent per day in the quarter, slightly above the midpoint of management's guidance. Production was up 2% sequentially and was dented by the decision to shut in a portion of Canadian production because of adverse pricing conditions.In addition to quarterly results, Devon announced that its board has approved the separation of its Canadian heavy oil and Barnett shale assets. The company noted that a spin-off or sale are both possible. The separation will position Devon in four key oil-focused assets in the United States--the Delaware Basin, the STACK oil play in western Oklahoma, the Powder River Basin, and the Eagle Ford. The transaction will give the new Devon a better growth outlook and an improved cost structure at the company level, but we don't expect the separation will create intrinsic value. If anything, it's a tough time to sell the Canadian assets with price realizations versus West Texas Intermediate depressed due to temporary takeaway capacity constraints.
Still, the move will let management focus on its key U.S. growth assets. We view the company's position in the Delaware as its most promising acreage. Devon holds a long-lived inventory of drilling opportunities in the attractive basin. In the STACK, a less mature play, Devon seems to be still working out the kinks in its development plan, namely spacing, but it isn’t that far away from entering full-field development mode. Delaware and STACK assets should drive a midteens compound annual growth rate for Devon’s U.S. oil production to the end of the decade.
The company also announced a $1 billion increase in its share-repurchase program to $5 billion. With the shares trading near our $30 fair value estimate, we view the buyback increase as value neutral.
Devon Energy is an independent energy company engaged primarily in the exploration, development and production of oil, natural gas and natural gas liquids. The company's operations are concentrated in various onshore areas in United States. The company's areas of operation include Delaware Basin, Eagle Ford, Powder River Basin and the STACK development, located primarily in Oklahoma's Canadian, Kingfisher and Blaine counties.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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