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Will Devon Energy's Unhedged Position in 2016 Be Its Downfall?

PART:
1 2 3 4 5 6 7 8 9 10
Part 10
Will Devon Energy's Unhedged Position in 2016 Be Its Downfall? PART 10 OF 10

Devon Energy’s Performance Driven by Crude Oil and Natural Gas

Devon’s 2015 performance

In this final part of our series on Devon Energy (DVN), we’ll be comparing the company’s stock movements with respect to the following:

  • movements in the broader market
  • crude oil and natural gas prices
  • the USDX (US Dollar Index)

Devon Energy’s Performance Driven by Crude Oil and Natural Gas

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As we saw in Part 1 of this series, Devon’s stock has fallen nearly 50% so far this year. The stock has been on a declining trend, mirroring crude oil and natural gas price movements.

In the above graph, it’s clear that Devon’s performance has been driven mainly by WTI (West Texas Intermediate) crude oil prices and natural gas prices.

The correlation coefficient between Devon’s stock price and crude oil prices from January 2015 to the present is ~0.8. This indicates a strong degree of correlation between crude oil prices and Devon’s stock prices. In the same period, the correlation coefficient between DVN and natural gas prices was 0.58. This also indicates a significantly positive correlation between the two.

Many upstream companies such as ConocoPhillips (COP) and Hess (HES) have taken a hit due to weakening commodity prices. You can read a detailed overview of these companies at ConocoPhillips: the Investor’s Guide You’ve Been Waiting For and Outlook for Hess: Will Crucial Projects, Cost Cuts be Enough?         

All these companies make up ~7% of the Energy Select Sector SPDR ETF (XLE).

From the above graph, we can see that DVN stock has given lower returns compared to WTI’s and natural gas’s returns on a YTD (year-to-date) basis.

When compared to the broader market, the S&P 500 ETF (SPY), DVN has underperformed SPY. As we can see in the graph, DVN is negatively correlated to the USDX. Since January 2015, USDX has returned ~7%.

Conclusion

Like many upstream companies, Devon Energy (DVN) has been struggling with the weaker commodity price environment. As the company transitions into an oil-heavy player, the major concern investors might have is its hedging position in 2016 (read Part 5). As the company ramps up its oil volumes, failure of recovery in oil prices might not bode well for Devon. However, we can’t forget its midstream exposure, which to an extent has helped the company survive the volatile environment in 2015. When and if prices do recover, the company can benefit significantly.

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