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ModernGraham Valuation: Devon Energy Corp (DVN)

moneyCompany Profile (obtained from Google Finance): Devon Energy Corporation (Devon) is an independent energy company engaged primarily in the exploration, development and production of oil, natural gas and natural gas liquids (NGLs). The Company’s operations are concentrated in various North American onshore areas in the United States and Canada. The Company also owns natural gas pipelines, plants and treatment facilities in many of its producing areas. The Company holds 14 million net acres, of which roughly two-thirds are undeveloped. The Company’s properties in the United States include Barnett Shale, Cana-Woodford Shale, Permian Basin , Gulf Coast/East Texas, Granite Wash , and Mississippian. Its properties in Canada include Jackfish, Pike, Lloydminster. In August 2013, Meritage Midstream Services II, LLC acquired Thunder Creek Gas Services, LLC (Thunder Creek) from Devon and PVR Partners, L.P (PVR). In November 2013, the Company acquired GeoSouthern Energy’s assets in the Eagle Ford oil play.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $49.41
MG Opinion Overvalued
Value Based on 3% Growth $18.61
Value Based on 0% Growth $10.91
Market Implied Growth Rate 19.04%
NCAV -$34.28
PEmg 46.58
Current Ratio 1.32
PB Ratio 1.18

Balance Sheet – 9/30/2013 

Current Assets $6,315,000,000
Current Liabilities $4,782,000,000
Total Debt $7,956,000,000
Total Assets $40,846,000,000
Intangible Assets $5,954,000,000
Total Liabilities $20,234,000,000
Outstanding Shares 406,000,000

Earnings Per Share

2013 (estimate) $0.29
2012 -$0.47
2011 $5.10
2010 $5.29
2009 -$6.20
2008 -$6.95
2007 $6.97
2006 $6.29
2005 $6.26
2004 $4.38
2003 $4.00

Earnings Per Share – ModernGraham 

2013 (estimate) $1.28
2012 $0.97
2011 $1.41
2010 $0.07
2009 -$1.27
2008 $1.93

Conclusion:

Devon Energy Corp is a company that has had some very wide swings in the business cycle, including three negative years out of the last ten.  It is this earnings instability, along with a poor current ratio and a high PEmg ratio that disqualifies the company from the Defensive Investor’s selection.  For the Enterprising Investor, the lack of earnings stability and high debt relative to current assets eliminates the company from further consideration.  Therefore, value investors seeking to follow Benjamin Graham’s methods should seek other opportunities, such as by reviewing ModernGraham’s valuations of Exxon Mobil (XOM) and Conoco Phillips (COP).  As for a valuation, the company has grown its EPSmg (normalized earnings) from -$1.27 in 2009 to an estimated $1.28 for 2013.  However, the market is currently implying a growth rate estimate of 19.04%, a rate which is not quite supported by the company’s historical growth.  As a result, the company appears to be overvalued currently.

What do you think?  Do you agree that Devon Energy Corp is overvalued?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Devon Energy Corp (DVN) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill

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