Day Sees Bright Days for Devon

12/20/2002 12:00 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

"Natural gas has risen to $5.25 bcf, a contract high and up from under $3 bcf at the beginning of the year," notes Adrian Day, a leading specialist in natural resource stocks and editor of The Global Analyst. "The unexpected visit from Old Man Winter and a huge withdrawal from natural gas storage, have driven prices sharply higher. Although this strength is not sustainable, we do believe in the longer-term gas story." Here is Day's commentary on a favored natural gas play.

"We consider Devon Energy (DVN ASE) as a class act among independent natural gas exploration and production companies. After two major acquisitions last year, Devon is now the second-largest gas producer among the North American independents. Over the past year, Devon successfully integrated these acquisitions, and sold off marginal assets in an aggressive disposition program that enabled it to cut debt by $1.3 billion. Its current debt levels are not out of line with the sector, but Devon aims to continue to cut debt next year, though more from cash flow than asset sales, aiming for an improvement in its already respectable credit rating. Cash flow was sufficient in the year just ending to fund $1.65 billion in capital expenditures on its properties, and it looks for a similar budget next year.

"Devon has jumped to the top leagues in just a few years, with a reputation for achieving targets, and being straight with partners and shareholders. It is disciplined but also opportunistic. Traditionally, Devon has grown from acquisitions combined with low-risk exploration. It has been particularly successful generating projects for near-term growth in the Gulf and in Canada, and longer-term growth internationally, including offshore China, with production expected by late 2003; and in Azerbaijan, where Devon has a 5% carried interest in perhaps the largest oil development in the world today.

"It has a deep bench of technically strong and straightforward people. Founder John Nichols is a somewhat rare gentleman in a cut-throat business. Overall, Devon is on track and has shown it can succeed. And despite its superior record, it remains one of the cheaper stocks in its peer group, trading below its net asset value. We expect to be owners of these shares for quite a while. Currently trading at $47.83, any weakness should be viewed as an opportunity to buy."

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