On Tuesday, Mizuho Securities adjusted its outlook on Devon Energy Corp (NYSE:DVN), a player in the energy sector, by reducing its price target to $58 from the previous $61, while sustaining an Outperform rating on the stock. The adjustment follows Devon Energy's recent acquisition of Grayson Mills, which was finalized on Monday.
Mizuho's evaluation of the deal through their proprietary ARCHIE database suggested that the acquisition might be approximately 5% dilutive to Devon's net asset value (NAV). Despite this dilution, the firm anticipates around a 10% increase to the company's cash flow per share (CFPS) for the years 2025 and 2026.
The firm's analyst remarked that despite the deal not meeting their long-term cash generation criteria, Devon Energy's shares still present an approximate 27% upside to the newly set price target.
This perspective takes into account the current discount at which Devon Energy is trading compared to its peers, as well as the market's reaction to the acquisition, which saw Devon Energy's stock underperform by 1% against the S&P Oil & Gas Exploration & Production Select Industry Index (XOP) on Monday.
Additionally, Mizuho highlighted that the modest synergies expected from the acquisition have been factored into their outlook. Moreover, the potential benefits from refracturing operations in the Bakken formation are not included in their model, which could provide additional optionality for Devon Energy going forward.
The firm's revised price target of $58 reflects a new valuation based on the net asset value after considering the impact of the Grayson Mills acquisition. Despite the downward revision, Mizuho's Outperform rating indicates a continued positive view on Devon Energy's stock performance potential.
In other recent news, Devon Energy has been making substantial strides in the energy sector. The company recently announced two significant acquisitions. The first is the purchase of Grayson Mill Energy's Williston basin operations from private equity firm EnCap for a total of $5 billion, which is expected to add approximately 500 new wells to Devon's portfolio and contribute an additional 307,000 net acres to the company's Williston Basin holdings.
The second acquisition is a private $5 billion deal in the Bakken shale region, expected to enhance shareholder returns, particularly through stock buybacks.
Devon Energy has also increased its share buyback program from $3 billion to $5 billion, reflecting its focus on growth and shareholder returns. TD (TSX:TD) Cowen maintained a Hold rating on Devon Energy, while Truist Securities maintained a Buy rating, indicating the quality of the assets added to Devon's portfolio through these transactions.
However, Devon Energy has faced some setbacks in securing other deals. The company was outbid by ConocoPhillips (NYSE:COP) in a $22 billion deal for Marathon Oil (NYSE:MRO) and by Occidental Petroleum (NYSE:OXY) with a $12 billion offer for CrownRock. Despite these challenges, analysts believe that Devon is likely to secure a deal in the future as it addresses its production issues.
On the personnel front, Devon Energy appointed John Bethancourt as the new independent chair of its board, effective July 1, 2024.
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