The near-term direction of oil and gas prices remains uncertain, so we think the best way to cut risk is to look for companies with rising production that are trading at reasonable multiples to cash flow. Here are two with sound long-term prospects.
DEVON ENERGY CORP. $61.60 (New York symbol DVN; TSINetwork Rating: Speculative) (405-235- 3611; www.dvn.com; Shares outstanding: 409.1 million; Market cap: $24.4 billion; Dividend yield: 1.6%) is one of the largest U.S.-based oil and natural gas explorers and producers. Its production mix is 46% gas and 54% oil.
The company narrowed its focus with its July 2014 sale of some of its properties to Linn Energy for $2.3 billion. The deal included Devon’s holdings in the Rockies, the onshore Gulf Coast and the Mid- Continent region (which includes Oklahoma, Kansas and Texas).
The sale lets Devon focus on what it views as lowrisk/ high-reward properties, especially the oilproducing assets it bought in Texas’s Eagle Ford shale formation for $6 billion in 2013.
As well, 80% of the production from the properties Devon sold to Linn is natural gas, so the deal will let the company continue to shift its focus to oil from gas.
Meanwhile, Devon’s daily output averaged 671,000 barrels of oil equivalent in the quarter ended September 30, 2014, down 2.9% from 691,000 a year earlier. The decline resulted from the sale of producing properties. Cash flow per share fell 20.6%, to $3.08 from $3.88, on lower realized oil prices.
The company’s $12.1 billion of debt is a manageable 49.6% of its market cap. It also holds cash of $3.4 billion, or $8.31 a share.
The stock trades at 5.0 times Devon’s annual cash flow of $12.32 a share, based on the latest quarter— although that estimate could fall if oil prices remain low for some time.
Devon Energy is a buy.
CIMAREX ENERGY $102.82 (New York symbol XEC; TSINetwork Rating: Extra Risk) (303-295-3995; www.cimarex.com; Shares outstanding: 87.2 million; Market cap: $8.6 billion; Dividend yield: 0.6%) produces and explores for natural gas and oil. Gas makes up 50% of the company’s output.
Cimarex’s properties are mostly in the Wolfcamp shale area of the Permian Basin in Texas and New Mexico, as well as the Cana-Woodford shale region in western Oklahoma.
In the three months ended September 30, 2014, Cimarex’s production averaged 942.4 million cubic feet of natural gas equivalent a day, up 31.5% from 716.8 million cubic feet a year earlier.
Thanks to the higher production and increased gas prices, Cimarex’s cash flow per share jumped 34.7%, to $5.86 from $4.35. Its total debt of $1.5 billion is a reasonable 17.4% of its market cap.
The stock trades at 4.4 times the company’s annual cash flow of $23.44 share, based on the latest quarter. However, like Devon, that estimate will fall if oil prices remain low.
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