Why Devon Energy Stock Slumped Nearly 13% in September
Shares of Devon Energy (NYSE: DVN) fell 12.6% in September, according to data provided by S&P Global Market Intelligence. The culprit was lower oil prices. That offset the positive effect of closing a needle-moving acquisition.
Down despite a big deal
Oil prices were under pressure again last month. WTI, the main U.S. oil price benchmark, fell another 7.3% in September, closing the month at around $68 per barrel. It has now declined by 16.4% over the past quarter.
The main factor is the potential for a surge in new supply later this year if OPEC boosts its production in December as planned. That potential increase in output is coming at a time when demand concerns are rising due to a possible slowdown in the global economy. Lower oil prices would hurt the cash flows of oil stocks like Devon, which is why it was under pressure last month.
Weakening crude prices overshadowed some notable news from Devon last month. The oil company closed its strategic acquisition of Grayson Mill Energy. The transformational $5 billion deal will significantly enhance the company's operations in the Williston Basin. It will increase the company's scale in the region while reducing costs, putting it in a stronger position to produce free cash flow at lower oil prices.
The Grayson Mill Energy transaction should be highly accretive for Devon Energy. It acquired the company at a 15% free-cash-flow yield based on an $80 oil price. It's still a very attractive acquisition at the current price point.
The highly accretive nature of the deal drove Devon Energy to significantly expand its share repurchase authorization. It increased the plan by 67% to $5 billion through the middle of 2026. That will give the company more capacity to buy back its cheap stock. Devon trades at about a 9% free-cash-flow yield at $70 oil following the Grayson Mill Energy deal. That's a discount of more than 50% to the S&P 500 and three times cheaper than the Nasdaq.
This high-quality oil stock is on sale
Shares of Devon Energy slumped last month due to lower oil prices. Because of that, the company trades at a bottom-of-the-barrel valuation, especially after closing its highly accretive deal for Grayson Mill Energy. The company can use its improved free cash flow from that transaction to buy back even more of its dirt-cheap shares, which should create a lot of value for its shareholders in the long run. It makes Devon a very compelling investment opportunity for those seeking a value play in the oil patch.
Should you invest $1,000 in Devon Energy right now?
Before you buy stock in Devon Energy, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Devon Energy wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $728,325!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of September 30, 2024
Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Why Devon Energy Stock Slumped Nearly 13% in September was originally published by The Motley Fool