Devon Energy: A Breakout Story in Progress

I love breakout stories and I like to set my sight on potential breakout targets in order to enjoy a first mover advantage when the breakout starts. More so, I know how to locate upside potential in breakout stories that have already started.  A particular breakout stock that currently has my attention is Devon Energy Corp (NYSE:DVN), a $32.34B energy company. Devon is an independent energy company engaged primarily in the exploration, development and production of oil, natural gas and natural gas liquids (NGLs).

Breakout in Progress

Devon Stock Chart

The stock chart above shows how shares of Devon have traded since the market opened in January. You will observe that the share price was flat for much of January and February when the stock traded in the $60 to $65 range. You will also notice the breakout towards the end of March and you can see that the breakout has continued to the current share price around $79. In the final analysis on share price, Devon is trading above its 20, 50 and 200-day moving averages; the stock is up 29.71% since the market opened this year.

Another point that reaffirms the continuation of the breakout story is that the stock has made 18 new highs in the last one month. More so, the stock has made a new record high to $79.49 today (around 1:58PM EST) even as the stock trades up on gains of 2.41%.

Why the Breakout Will Continue

The impressive growth already recorded by Devon Energy in the year-to-date might looks like a rally gone too far and thus, some people way want to shy away from the stock for fear of a pullback. However, below are two good reasons why the breakout is set to continue in the coming months.

  1. Reasonable Valuation

At the market capitalization of $32.34B, Devon is reasonably priced with a P/E ratio around 18, a Forward P/E ratio of 13.32 and a PEG Ratio of 0.97. You will also be impressed with Devon’s Enterprise value/EBITDA at 5.62 which compares favorably with Chesapeake Energy’s Enterprise value/EBITDA ratio of 5.67 and which is cheaper than Anadarko Energy’s Enterprise value/EBITDA ratio of 7.01.

  1. Strategic Acquisition to Expand Production

In May, Devon announced the agreement to acquire 50,000 net acres and associated production primarily in the Cana-Woodford Shale for $249 million in cash.  Devon’s portion of the agreed acquisition includes current production of approximately 5,800 barrels of oil equivalent per day (37 percent liquids) and proved reserves of approximately 23 million barrels of oil equivalent. You will remember that Devon had earlier made a $6B purchase for 82,000 acres in Eagle Ford. These acquisitions will generate about 53,000 barrels a day and the company expects production to triple to about 145,000 barrels per day in 2017.

An increase in production will automatically cause revenue to increase even as the company expects revenue to reach $14.2B.Revenue is expected to grow by 36.80% this year and by 10.90% next year.  In addition, EPS is expected to increase by 35.70% this year, 10.60% and by 14.27% for the next 5 years.

How to Trade DVN Options

I am bullish on Devon Energy and I have an $85 price target on the stock in the next six months. Devon Energy is set to release Q2 2014 results on August 6 and I expect the stock to rise at a faster pace if the company beats expectations. I recommend the DVN Jan 2015 80.000 call (DVN150117C00080000).

— Daily Option Alerts

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