Devon: A Solid Turnaround

04/18/2014 8:00 am EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation


Our latest list of trading ideas is heavy with still-resilient cyclical stocks with great projected growth during the next couple of years. Our Top Pick is a big company with a solid turnaround story after a few down years, says Mike Cintolo, editor of Cabot Top Ten Trader.

Devon Energy (DVN) is a huge energy company (more than $10 billion in revenue) that has shifted focus during the past couple of years and now looks like a major turnaround opportunity.

The firm is in the process of selling non-core, generally, natural gas-heavy assets (including some Canadian operations for north of $3 billion, recently) and, conversely, acquiring some oil-rich acreage, including its recent buy of 82,000 net acres in the Eagle Ford shale.

The company even made a bold move to combine some midstream assets with CrossTex Energy, resulting in a powerhouse—Devon’s stake in the venture is estimated to be worth $7 billion, more than one-quarter of the current market cap!

Back to the production side, Devon’s not just planning on solid growth in oil production (up more than 20% in 2014), but the company should be solidly free-cash-flow positive, a rarity among exploration firms.

In the Eagle Ford alone, Devon expects to spin off $2.5 billion of cash during the next four years, while its remaining Canadian operations should start throwing off lots of cash next year.

Management has been slowly buying back shares (20% cut in the share count during the past decade) and boosting the dividend (now 1.4% annually), and there’s probably more where that came from, considering the earnings estimates for the next two years. We like the story and potential here.

DVN peaked at $127 in 2008, and then formed a long double bottom at $51 (reaching that level in late 2011 and mid-2013). It recently leapt to its highest price since 2012 on very healthy volume. If you’re game, you could nibble around here with a stop near $63.

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