This American Shale Play Will Show The Saudis Who’s Boss

Here’s the crude truth: Energy volatility is here to stay. Even as oil and gas prices continue their long-term ascent, dizzying intraday swings in the energy patch are the new normal. However, this relentless dynamic creates buying opportunities for you, such as the energy stock that I pinpoint below.

If you’re looking to “Buy American” and also benefit from energy’s long-term resurgence, this Oklahoma-based shale producer belongs in your portfolio.

If the Saudi Arabia-led crude oil production cut only lasts a limited time, American shale drillers still boast robust backlogs of non-drilled but proven leases that they can quickly deploy. That means they win, even if OPEC ultimately loses.

In the meantime, the energy markets this week have been whipsawing investors.

Crude oil prices on Wednesday posted their biggest one-day drop in more than a year due to bearish news on inventories. As of this writing, oil prices continue to seesaw.

Robert Rapier, chief investment strategist of The Energy Strategist, isn’t worried. He deems these plunges as overreactions that benefit bargain hunters:

I view emotional sell-offs as buying opportunities for good companies. Underlying fundamentals haven’t changed, but share prices have become more compelling.”

Robert is a master at reading between the lines and providing context. Here’s his take on the recent carnage in the energy patch:

“Why do I think this sell-off is emotional? It was triggered by the latest Weekly Petroleum Status Report from the Energy Information Administration that showed crude oil inventories in the U.S. had risen by 8.2 million barrels over the previous week, to an all-time record high.

High crude oil inventories are certainly not bullish news, but a little context is in order. This is refinery maintenance season, when refinery utilization drops. This reduces demand for oil, but at the same time it results in finished products being drawn down.”

Indeed, the International Energy Agency this week released its widely followed Oil 2017 report, which projects continued multi-year growth for the energy sector. The report estimates the addition of at least a million barrels per day (bpd) of demand every year. The report also states that global oil demand is on track to pass 100 million bpd in 2019 and reach about 104 million bpd by 2022.

The energy sector was the top-performing S&P 500 sector in 2016, but so far this year energy stocks have sputtered in the wake of disappointing earnings results from the energy “super majors.”

But again, as Robert points out:

“This is the sort of pullback that provides an opportunity. Natural gas inventories are 10% below the levels of a year ago, despite another mild winter.

The outlook for oil is at least moderately bullish, with Saudi Arabia reportedly targeting $60/bbl for its crude… We expect energy demand to hold up and prices to eventually head higher.”

Prolific gains from the heartland…

For these reasons and more, I particularly like oil and gas producer Devon Energy (NYSE: DVN). Based in Oklahoma City, Oklahoma, Devon is different from many of its debt-ridden peers because management has carefully pruned its balance sheet to keep it strong and lean.

By sloughing off non-performing assets and prudently investing in Permian Basin projects, the company has sidestepped the fate of many shale producers that are now fighting to stave off bankruptcy.

With a market capitalization of $21.3 billion, Devon is the fourth-largest U.S. natural gas producer. Devon’s drilling rigs are exploiting prolific shale formations in Oklahoma and Texas and tar sands in Canada. The company’s largest energy reservoirs lay under the Permian Basin of West Texas.

Devon is operating 19,000 producing wells throughout 1.3 million net acres in the Permian Basin. The Permian is no Johnny-come-lately, with origins as a crude oil producer that trace back to the early 1920s. The total recoverable resource potential of the largest formations in the Permian Basin is about 75 billion barrels of oil equivalent, second only to the vast Ghawar Field in Saudi Arabia.

Solid cash flow, low debt and a strong balance sheet combined with growing production are holding Devon in good stead. The company should survive the increasing turbulence for energy that we’re likely to see under the unpredictable Trump regime.

This independent energy producer proves that the North American energy revolution is far from over. The average analyst expectation is for Devon’s earnings per share (EPS) in the current quarter to come in at 41 cents, compared to a loss of 53 cents per share in the same quarter a year ago. For the full fiscal year, EPS is pegged at $1.95, versus a loss of 13 cents last year. Year-over-year earnings growth for fiscal 2018  is projected at 44.6%.

With a price-to-sales ratio of 1.7, Devon is a bargain compared to the industry average (3.7) and the S&P 500 (2.1). Devon is a momentum stock that you should jump aboard now, before the investment crowd makes it too expensive.

Got a question? Drop me a line: — John Persinos

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