Now that oil is backing away marginally from its $50 level, there has been an equal retracement in the price of energy stocks with it. I firmly believe that any retracement you see represents an opportunity, with oil markets now fast rebalancing and production rapidly dropping here in the US. But who do you buy? Further sales of Permian basin assets from Devon Energy (DVN) to Pioneer Natural Resources (PXD) on Thursday have made the heavily leveraged Devon a far better bet than it was even a few short weeks ago, and worth picking up as it hovers near $35 a share.
We had heard from CEO David Hager that he planned up to $3 billion in asset sales in order to retire debt while recommitting capital to their core Oklahoma STACK play, but nothing that’s said on conference calls means a thing until you actually see the strategy being executed. Devon’s sale of Granite Wash assets two weeks ago for about a billion dollars was a very encouraging first sign.
On Thursday, the encouragement got stronger, as Devon sold another $858 million of non-core assets in the Midland subsector of the Permian, bringing their total announced sales already above $2 billion dollars. That’s a superb job of accelerating needed asset sales at reasonable valuations considering today’s oil market – and delivers much of what Hager has promised to shareholders: a stronger balance sheet with a debt reduction of nearly 25 percent of the $10.4 billion of net debt the company…
Now that oil is backing away marginally from its $50 level, there has been an equal retracement in the price of energy stocks with it. I firmly believe that any retracement you see represents an opportunity, with oil markets now fast rebalancing and production rapidly dropping here in the US. But who do you buy? Further sales of Permian basin assets from Devon Energy (DVN) to Pioneer Natural Resources (PXD) on Thursday have made the heavily leveraged Devon a far better bet than it was even a few short weeks ago, and worth picking up as it hovers near $35 a share.
We had heard from CEO David Hager that he planned up to $3 billion in asset sales in order to retire debt while recommitting capital to their core Oklahoma STACK play, but nothing that’s said on conference calls means a thing until you actually see the strategy being executed. Devon’s sale of Granite Wash assets two weeks ago for about a billion dollars was a very encouraging first sign.
On Thursday, the encouragement got stronger, as Devon sold another $858 million of non-core assets in the Midland subsector of the Permian, bringing their total announced sales already above $2 billion dollars. That’s a superb job of accelerating needed asset sales at reasonable valuations considering today’s oil market – and delivers much of what Hager has promised to shareholders: a stronger balance sheet with a debt reduction of nearly 25 percent of the $10.4 billion of net debt the company holds. Further sale of their 50 percent ownership in the Access pipeline should bring the cash raise up the promised $3 billion mark.
On the other side of the trade is CEO Scott Sheffield’s Pioneer Natural Resources, the buyer of $435 million of those Midland assets.
I have also outlined the contrast of the strategy that Sheffield continues to pursue, of increasing production at breakneck speed by increasing both working acreage and reserves. In an oil environment where virtually everyone has recognized the need to hunker down, restore balance sheets and wait for better market conditions for growth, Sheffield continues to operate Pioneer as if he’s convinced that oil prices will reach triple digits again soon, increasing production 18 percent for 2016 alone, in a market that’s barely gotten back to $50 once. He could be right in his bullishness, but he’s banking his company on that bet; for this Devon buy, Pioneer will undertake a 5.25 million secondary stock offering – hence the major 6 percent hit to shares today.
Devon claims that much of this acreage is unproven, while Pioneer is well acquainted with its potential – of the 28,000 acres it bought, 15,000 acres are near their already strong Wolfcamp A acreage. From a straight “who got the best deal” perspective, you’d have to give the nod to Pioneer.
But from a strategic perspective, I’m much more impressed with Devon’s move.
Like Sheffield, I’m very bullish on oil. I believe as he does that oil markets are rebalancing quickly, that quality acreage is rare and will be this cheap for only a very short time to come. But when I’m investing in oil stocks, I’d much rather have the company that will survive if I’m only “mostly” right in my bullishness. What happens if oil in fact goes only as high as $60, but cannot breach that for the next few years? For Devon, they will be equipped to survive even that more extended bust cycle. For Pioneer, the anchor of debt that they’ve strapped around their neck will ultimately prove to be fatal.
Does this make Pioneer a worse bet? For me in sizing up these two stocks, it does. Devon has paid dearly for its overleverage, dropping from a high of nearly $80 a share to trade closer to $20 before its turnaround. Pioneer is still very dearly priced at over $152 a share, barely down 34% from its highs in 2014.
For me, the value for the long haul is with the more conservative planner right now. I previously recommended buying Devon as it pulled back to around $35 where it traded today. That’s the one I’m pulling the trigger on.
