Oil Giant Devon Energy Takes a Hit as Crude Prices Plummet
Devon Energy’s stock price plummeted 12.6% in September, largely due to the decline in oil prices. Despite the company’s recent acquisition of Grayson Mill Energy, a deal worth $5 billion, the dip in oil prices overshadowed the positive news. The main culprit behind the falling oil prices is the anticipated surge in new supply later this year, which is expected to come from OPEC’s planned production increase in December.
The potential influx of new oil supply is happening at a time when global economic growth is slowing down, leading to concerns about demand. As a result, oil prices have taken a hit, falling 16.4% over the past quarter. This decline has had a ripple effect on oil stocks like Devon Energy, which rely heavily on cash flows generated from oil sales.
However, the acquisition of Grayson Mill Energy is expected to be highly accretive for Devon Energy. The deal will not only increase the company’s scale in the Williston Basin but also reduce costs, enabling it to produce free cash flow even at lower oil prices. In fact, the acquisition is expected to generate a 15% free-cash-flow yield based on an $80 oil price, making it an attractive deal even at current price levels.
The highly accretive nature of the deal has prompted Devon Energy to expand its share repurchase authorization by 67% to $5 billion through mid-2026. This move will give the company more room to buy back its undervalued stock, which currently trades at a 9% free-cash-flow yield at $70 oil. This represents a significant discount of over 50% to the S&P 500 and three times cheaper than the Nasdaq.
As a result, Devon Energy’s stock has become a compelling value play in the oil patch. With its improved free cash flow from the Grayson Mill Energy deal, the company can buy back more of its undervalued shares, creating significant value for its shareholders in the long run.
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