Devon Energy: Executing Well but Commodity Headwind Supports Lower Fair Value

We're lowering our fair value for Devon Energy to $38 from $42 after taking a second look at the firm's first-quarter operating and financial results. The reduction was influenced by our updated forecast for crude oil basis differentials across the portfolio. We were previously expecting the firmwide weighted average realized crude price to line up with the WTI benchmark in the next few years, with premium prices in some areas offsetting discounts elsewhere (which is broadly what happened in 2022). This now feels optimistic, as differentials slightly weakened in most of Devon's operating areas, and our updated model incorporates a weighted average discount of 1%. In addition, the near-term outlook for benchmark crude and natural gas prices has deteriorated sharply since our last update in February. And while we previously highlighted several positive takeaways from the quarter, including better-than-expected production and lower-than-expected operating costs, we believe we were already capturing these benefits in our model. The net impact on our valuation is therefore negative, and the update puts Devon stock in 2-star territory, even after the market selloff in the first trading session after the release.