Devon Energy's Higher Production, Lower Debt Could Salvage Its Stock

NEW YORK (TheStreet) -- Devon Energy's (DVN) shares haven't performed well in recently, losing 14% of their value in the last three months. The weakness in crude oil prices pressured this stock as well as shares of other leading oil and gas producers such as Chevron (CVX) and Exxon Mobil (XOM) . But Devon Energy still has several strong points that could pull its stock back up in the coming months. Let's examine them.

For one, the company continues to expand its oil output in assets such as the Eagle Ford Shale and the Permian Basin. The Eagle Ford Shale holdings were purchased earlier this year. According to the company's recent earnings report, oil production rose by 33% year over year. This higher output has contributed to the rise in its profitability, as indicated in the chart below.

Source of data: Devon Energy's Web site

The company has been shifting gears by cutting down on its natural gas operations, which tend to yield lower profit margins than oil and natural gas liquids.

Also, in the company's latest conference call, the management stated that it continues to invest in new designs for its oil well drilling methods in an attempt to increase the yield of its wells. This development could lead, over time, to higher returns per well due to higher output.

The company also reached its quarterly goals as it reached adjusted diluted earnings per share of $1.34 in the past quarter, 12 cents higher than analysts' consensus. This is another boost for confidence in the company's management.

Devon also expects to increase its quarterly output in oil and NGL in the fourth quarter.

Plus, Devon Energy is in a strong financial position. Its debt burden is relatively low, with a debt-to-equity ratio of 0.54. In comparison, Chesapeake Energy (CHK) and Anadarko Petroleum (APC) each have a debt-to-equity ratio of 0.71.

One way to reduce its debt is by selling off non-core assets. Back in August, Devon Energy sold assets worth $2.3 billion and transferred them in November. In total, it sold over $5 billion worth of assets during the year.

The company currently has $3.4 billion in cash, which could provide its management the means to acquire more oil fields. The current weak oil environment may provide an additional incentive for other oil companies to consider selling assets to Devon Energy.

Devon is also expanding its natural gas liquids output in recent quarters. In the third quarter alone, its NGL operations grew by 10% year on year. The Energy Information Administration expects NGL prices to come down this winter, which could impede the company improving its profit margins in the near term. But on a yearly scale the EIA estimates that NGL prices will be higher in 2015 compared to 2014.

The strong balance sheet, expanding operations and improving profit margins mean that shares of Devon Energy could bounce back.

At the time of publication, the author held no positions in any of the stocks mentioned.

Follow @tradingnrg

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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