DVN : NYSE : US$64.54
Devon Energy is an oil and gas E&P company with assets in the U.S. and Canada. The company also has a significant midstream operation. It is headquartered in Oklahoma City, OK.
All amounts in US$
CROSSTEX MERGER BENEFITS BOTH
MIDSTREAM AND E&P
We believe DVN’s merger of its midstream operation with Crosstex Energy, an existing publicly traded MLP/GP, generates many positives.
The merger increases the scale and scope of its midstream business, fosters added growth opportunities and enhances the new entity’s finances. This should keep DVN’s midstream valuation robust. It also highlights how undervalued its E&P business is – something we think can change for a variety of reasons.
DVN’s new midstream valuation is much higher: Post the Crosstex merger the valuation is now far higher than what it was within DVN previously. Market value for DVN’s portion of the publicly traded midstream MLP/GP is $6.7B ($16.50/share) or 25% of its market cap, yet the midstream accounts for just 9% of DVN’s total EBITDA.
Conversely, DVN’s enhanced midstream valuation now spotlights its deeply undervalued E&P operations: E&P is receiving an implied valuation of 3.4x 2014E EV/EBITDA. This is a discount of ~$20/share to where we believe it should be given DVN is:
a) growing its high margin oil & liquids volumes at 15% YoY and
b) now has a greater ability to execute value enhancing E&P acquisitions using its MLP as a source of low-cost capital.
MLP augments DVN’s ability to grow E&P via acquisitions: Abetted now by a rich MLP “currency”, we believe DVN’s E&P growth could be accelerated via acquisitions of undervalued E&P assets which would help to close its valuation gap.
Our price target rises to $86 from $77 based on our new sum-of-theparts