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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Devon Energy

October 18th 2018

Devon Energy
NYSE Symbol: DVN
Industry: Energy
Price as of 10/17: $36

 

A sharp pullback to start the fourth quarter is providing a buying opportunity for many blue chip stocks. Thanks to strong fundamentals and tax cuts, US corporations are flush with cash. Many companies are using the cash for share buybacks. We have recently highlighted a number of companies buying back at least $20 billion worth of stock like Apple, Citigroup, Royal Dutch Shell, JP Morgan and Bank of America.  The recent market pullback only helps these companies buy back their stock at lower levels providing better long-term value. Apple, the financials and the energy space remain my favorite stocks and sectors. This week we'll highlight another energy stock with a large share buyback plan in place. The stock of the week is Devon Energy.

Devon Energy is a turnaround story recently selling off their midstream business for $3.125 billion. Revenue will be down year over year due to the midstream sale, but the company is aggressively expanding oil production by spending 60% of their cash expenditures to create 50 new wells in New Mexico and 9 new projects in Oklahoma. Production in New Mexico will be up 50% year over year as the fundamentals and the cash flow improve. With the recent business reorganization, free cash flow will improve to a billion dollars a year.

With the improving fundamentals, Devon has initiated an aggressive share buyback plan. With the sale of their midstream business, Devon accelerated their buyback program to $4 billion or 20% of their outstanding shares. Devon has already bought back $2 billion worth of stock and expects to complete its $4 billion share-repurchase program by  the first quarter in 2019.

With the price of oil near a four-year high and a buyback of 20% of their outstanding shares, Devon's earnings should rise dramatically. Analysts are projecting a 70% boost to earnings year over year even as sales decline. The stock currently trades for 13 times earnings. If the new wells in New Mexico and the new projects in Oklahoma pan out as management expects, Devon's share buyback may dramatically boost earnings and the stock in the coming years. .