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Investing in oil stocks can be a strategic move, especially in light of geopolitical uncertainties that could affect the energy sector.
Devon Energy (DVN 1.26%) shares have largely mirrored the fluctuations in oil prices this year. A significant drop in oil prices has correlated with a recent slump in Devon’s stock, prompting several analysts on Wall Street to express cautious outlooks.
Recent Adjustments to Price Targets
In light of falling oil prices—from a peak of around $80 in the summer to approximately $72—analysts have been adjusting their price targets for Devon Energy. Recently, Truist joined firms like JPMorgan, Mizuho, and Morgan Stanley in reducing their projections.
Despite these downgrades, it is noteworthy that these analysts continue to maintain a buy rating on the stock. The Truist analyst remains optimistic, suggesting that oil prices might stabilize around $65 per barrel.
Why Devon Energy is a Compelling Investment
Should the Truist analyst’s prediction hold true, Devon emerges as an appealing option, particularly for those focused on generating income. During the second-quarter earnings call, company management projected that at an oil price of $70, Devon could achieve a free cash flow (FCF) yield of around 9% in 2024, based on a stock price near $42.80.
Given the recent decline in stock value, Devon’s current FCF yield stands at approximately 9.4%. This yield positions the company well to either enhance its variable dividend or focus on share repurchases, providing further incentive for investors.
Moreover, ongoing geopolitical tensions in the Middle East could disrupt oil supply chains, potentially leading to increased oil prices. This uncertainty gives investors a reason to diversify their portfolios with oil stocks as a defensive measure.
Lastly, the market seems to be undervaluing Devon Energy, particularly following its acquisition of assets within the mature Bakken oil field. Nevertheless, it is essential to note that Devon’s main assets are still located in the more prolific Permian Basin. A 9.4% FCF yield indicates that investors could potentially recover their entire investment in FCF over a span of just 11 years, suggesting that the stock is undervalued at present.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends JPMorgan Chase and Truist Financial. The Motley Fool maintains a disclosure policy.
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