Analyst Note| Dave Meats, CFA |
We are relaunching coverage of U.S. oil producer Devon Energy with a fair value estimate of $18 per share. The stock has been on a tear in the last couple of weeks, driven by a wave of positive news about COVID-19 vaccines. In fact, since Pfizer's Nov. 9 announcement, Devon shares have already gained almost 50%. But we still see further upside. Vaccine progress increases the probability that the virus can be beaten, paving the way for a return to normality with a near-complete recovery in crude consumption. But unless drilling activity rises from bare minimum levels, the supply response will be insufficient and the glut will become a shortage. Significantly higher crude prices are necessary to incentivize this, but the market is still extrapolating bottom-of-the-cycle crude prices to infinity. As a result, most energy companies, including Devon, are undervalued.