Devon Energy Ups to Neutral

On January 10, 2013, we upgraded our recommendation on the independent energy company, Devon Energy Corporation (DVN - Analyst Report), to Neutral from Underperform.

Why the Upgrade?

In third-quarter 2012, Devon’s earnings per share were ahead of the Zacks Consensus Estimate, aided by lower marketing and midstream operating expenses and a decline in tax charges.

Devon has exhibited capital discipline by rationally allocating its resources to projects that are vital for its future growth. Currently, the company focuses on its oil and liquids-rich opportunities, and majority of its drilling programs are centered around oil-focused properties. Devon has also teamed up with international companies like Japan’s Sumitomo Corporation and China’s Sinopec to expand its portfolio, which will subsequently increase its production capabilities and improve financial results going forward.

We appreciate Devon’s steady liquidity position as well as operational efficiencies. This reflects its cash balance of $5.3 billion as of September 30, 2012 and third-quarter 2012 cash flow from operating activities of $3.8 billion. This financial stability enables the company to follow steady expansion strategy.

In addition, Devon intends to merge its U.S. personnel into a single operations group and expects to complete this process by first-quarter 2013. Post consolidation, we expect overall operational productivity, which in turn, will improve employee synergy and minimize operating costs.

However, we are primarily skeptical about volatility in commodity prices, which might partially mitigate the existing positives. Devon Energy Corporation currently has a short-term Zacks Rank #3 (Hold).

Other Stocks to Consider

Besides Devon Energy Corporation, other stocks in the energy sector that are currently performing well include Cabot Oil and Gas Corporation (COG - Analyst Report) and Sanchez Energy Corporation (SN - Snapshot Report). Both Cabot Oil and Gas, and Sanchez Energy currently carry a short-term Zacks Rank #1 (Strong Buy).

Oklahoma City-based Devon Energy Corporation engages primarily in exploration, development and production of oil and natural gas. With a market capitalization of $21.82 billion, the company has 5,200 full time employees.