Risk-Reward Balanced at Devon Energy - Analyst Blog

On April 10, we issued an updated research report on independent energy company Devon Energy Corporation DVN. Devon Energy is set to benefit from its focus on increasing its presence in Eagle Ford Shale and strategic ventures with international players. However, Devon has failed to increase its reserves in the last two years and needs to work out ways to expand its existing reserve base.

Devon Energy, a Zacks Rank #3 (Hold) stock, exited 2013 on a positive note riding on strong production and better realized prices. To strengthen its position in the reserve rich Eagle Ford shale, Devon is investing $1.1 billion in 2014. The company has plans to drill 200 wells in this region this year. The Eagle Ford finding can boost the reserves of the company.

Apart from focusing on its exploration and production activity, Devon is also paying attention to its midstream operations. Devon combined all of its U.S. midstream assets with Crosstex Energy Inc. to form a new midstream MLP business, EnLink Midstream Partners LP (ENLK). Devon will have a significant influence on the operation of the new business through its majority ownership interest in both the general partner and the MLP and majority representation on both boards. The emphasis on the development of midstream assets appears to be a smart move, given the oil and natural gas production boom in the U.S. shale plays.

Devon however operates in a very competitive oil and gas industry and will need to compete with other players like EOG Resources, Inc. EOG and Anadarko Petroleum Corporation APC to acquire and develop oil and gas leases and properties.

Devon Energy's operations are subject to U.S. and Canadian rules and regulations. The changes and modification to public policies can affect the operations of the company. Compliance with these provisions and adherence to any change in policies would increase operating costs and constrain margins.

Devon's strong financial position allows it to boost shareholder returns through dividend hikes. Devon has been rewarding its shareholders consistently since 1993. The company exited 2013 with a cash balance of $6 billion, providing ample liquidity for dividend payments, investment in organic growth projects and strategic acquisitions.