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Devon Energy Completes Transformation With Linn Energy Deal

Results Still Needed after Turnaround

Earlier in 2014, TheStreet flagged Devon Energy as the type of restructuring driller that might present an opportunity for stock investors. Devon Energy shares were little changed in early Monday trading at $79.50, but shares have gained nearly 30% year to date.

CEO Richels has been a savvy dealmaker when shedding the company's non-core drilling assets, generally achieving higher sale and spinoff values than the market had expected. In spite of good portfolio management, Devon Energy has been plagued by weak operating results.

Those poor operating results would likely prove unsustainable for current management, as TheStreet noted, and might catch the eye of activist investors who have targeted under-performing energy sector players.

In a mid-June initiation, Bank of America Merrill Lynch analysts said that Devon Energy had surpassed expectations with their asset sales and built a liquids backlog that could drive better operational performance. "Following changes in Devon Energy's asset mix in the past year our view is that Devon is undervalued; but the make-up of that value has evolved, with improved transparency on both the absolute dislocation from underlying asset value and the visibility on future growth," Bank of America said in a June 11 initiation of Devon Energy at "outperform" and a $100 price target.

A few weeks earlier, Wells Fargo analysts said they believed Devon Energy would finally hit its energy production growth targets and forecast the company would grow crude production by 25% in 2014, 17% in 2015 and 15% in 2016. That production growth, if Devon achieves it, would translate into one of the highest rates of earnings growth in the industry. Wells Fargo pointed to the GeoSouthern deal as a driver of improving performance.

After closing the deal with GeoSouthern assets in the Eagle Ford on Feb. 28, the pace of production has accelerated from 53 million barrels of oil equivalent a day (MBoe/d) to 64 MBoe/d. That acceleration makes Devon's second half guidance of 80-to-85 MBoe/d achievable, according to Wells Fargo.

On Monday, Wells Fargo analysts reiterated their outperform rating for Devon Energy. Devon Energy shares were little changed at $79.48 on Monday. Shares in the company have gained nearly 30% year-to-date.

With quarterly earnings due on Aug. 6, investors will now likely turn their focus away from M&A and to Devon Energy's operational performance versus.

-- Written by Antoine Gara in New York.

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