Devon Energy (NYSE:DVN) could be a safe haven for long-term gas bulls due to the synergies created by its substantial midstream business.
The natural gas company is very focused on drilling for liquids and targets liquids production growth of about 20 percent, up from 15 percent in 2011, making liquids 40 percent of production by year-end 2012. Liquids growth will be driven by Canadian oil sands, Permian, Cana Woodford, and liquids-rich Barnett.
"Inventory should enable multi-year double-digit liquids growth from an already strong base (35 percent of production, 42 percent of reserves), thus sheltering DVN from current painful gas environment," Jefferies analyst Biju Perincheril wrote in a note to clients.
The analyst said more well results from relatively undeveloped plays and disclosure of new stealth oil plays should help drive stock performance.
On the catalysts front, initial results from Utica, TMS, and Michigan A1 carbonate as well as further testing of the Wolfcamp formation in the Permian could help boost share price this year.
Success in one or two of these plays would help change the perception of the company as one lacking exploration expertise.
"Devon continues to screen as one of the cheapest stocks in our universe, trading at a (13%) discount to our 'proved-only' (P1) valuation of $82 and a (22%) discount to our $92 NAV. The catalysts mentioned should help the stock close its valuation gap," added Perincheril, who has a "buy" rating on Devon Energy shares.
Devon Energy reported better-than-expected quarterly profit despite declining from last year. For the fourth quarter, the company's profit fell to $507 million, or $1.25 per share, from $562 million, or $1.29 per share, reported last year. Adjusted earnings were $1.55 per share, topping Street view of $1.48 per share. Quarterly revenues grew to $2.59 billion from $2.14 billion a year ago.