The Company That 'Invented' Shale Gas Might Surprise You

• Devon Energy Corp DVN shares are down 35 percent since July 2, and are trading close to the lower-end of their 52-week range of $36.01 - $70.48.
• Bernstein’s Bob Brackett upgraded the rating on the company from Market Perform to Outperform, while reducing the price target from $63 to $58.
• Brackett believes that the success of the company’s New Devon strategy has been overshadowed by the macro environment.

Analyst Bob Brackett said that Devon revolutionized the US gas supply and then oil supply by “inventing” shale and “proving the ability to use massive hydraulic fracturing of horizontally drilled wells in low quality reservoirs.” This, however, did not work towards the company’s advantage in the longer run, because it reduced the need to grab shale land during the early days.

Consequently, “Devon was late to the best of the shale gas and then oil plays (e.g., Marcellus, Bakken, Eagle Ford),” Brackett pointed out.

After some struggles, the company announced the "New Devon" strategy which focused on “(a) delivering the Eagle Ford and Delaware, and (b) monetizing the midstream, while in addition reducing portfolio complexity and harvesting cash flow from a tar sands capital cycle,” the Bernstein report stated.

Brackett added, however, that the success of the strategy has been overshadowed by the macro backdrop.

The analyst identified three near-term catalysts that investors should focus on:

1. Recently, there has been a significant improvement in Devon's well results across the board. “If this is the beginning of a trend, it implies a step-up in performance metrics (e.g., recycle ratio and potentially production growth for a given capex spend).”
2. The ramp of Jackfish-3, which is expected by the end of this year. This translates to “an end to oil sands development capex and a harvesting of oil sands cash flow,” Brackett said, while adding, “We note DVN enjoys a fairly low decline rate given the presence of oil sands and mature Barnett Shale in the portfolio.”
3. Dropdowns to Enlink may prove to be a catalyst in the next few quarters. “Enlink trades at a significantly higher multiple to EBITDA than DVN. Potential dropdowns include the Access Pipeline and the pending acquisition of the NGPL pipeline in 2016,” the Bernstein report added.