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Devon Energy Stock Will Continue Its Impressive Rally. Here's Why

Stocks in this article: DVN CNQ ENLC ENLK

NEW YORK (TheStreet) -- Unlike some of its peers, Devon Energy (DVN) has been slow to shift from natural gas to oil, but it is quickly catching up.

The company is selling its noncore assets and is using the proceeds to fuel its growth in liquid fuels. Despite the asset sales, the company is eyeing double-digit growth in its oil production in the coming years, which will drive margin expansion and cash flow growth.

By the end of this year, Devon has forecast that its production will be 40% oil and 20% natural gas liquids, a significant shift from a few years ago when 70% of its production was natural gas.

Devon also a majority owner of a midstream master limited partnership, EnLink Midstream (ENLC) (ENLK), which stands to benefit from the shale boom.

EnLink's assets include more than 7,300 miles of pipelines, 12 processing plants and six fractionators. EnLink has operations in most of the oil and gas producing regions of North America, including the Permian Basin, Eagle Ford, Gulf Coast, Utica and Marcellus Shales. The MLP will benefit from the increasing oil and gas production from these regions.

Devon's debt-to-equity ratio is higher than the industry's average of 51%, but investors shouldn't worry because the company will shore up its balance sheet with upcoming asset sales and increased cash flow. The company has forecast double-digit growth in cash flows in the coming years.

Devon's shares are up more than 20% this year and are currently changing hands at around $75, yet they are priced just 13 times this year's earnings estimates, according to data compiled by Thomson Reuters. The shares are likely to continue going higher on the back of increasing oil production.

Last year, the company announced the expensive purchase of GeoSouthern's assets in Eagle Ford for $6 billion in order to grow its oil production in the the lower 48 states. The assets hold estimated reserves of 400 million barrels of oil.

Devon has been transforming into a North America-focused onshore energy company by selling its domestic and international assets.

This year, Devon sold most of its Canadian conventional assets to Canadian Natural Resources (CNQ) for $2.7 billion.

Since these assets are noncore, it is unlikely that the sale will have any significant impact on the company's growth targets, which are largely based on its oil-weighted core acreage.

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