Shares of Devon Energy (NYSE: DVN) fell 12.6% in September, according to data provided by S&P Global Market Intelligence. The culprit was lower oil prices. That offset the positive effect of closing a needle-moving acquisition.
Down despite a big deal
Oil prices were under pressure again last month. WTI, the main U.S. oil price benchmark, fell another 7.3% in September, closing the month at around $68 per barrel. It has now declined by 16.4% over the past quarter.
The main factor is the potential for a surge in new supply later this year if OPEC boosts its production in December as planned. That potential increase in output is coming at a time when demand concerns are rising due to a possible slowdown in the global economy. Lower oil prices would hurt the cash flows of oil stocks like Devon, which is why it was under pressure last month.
Weakening crude prices overshadowed some notable news from Devon last month. The oil company closed its strategic acquisition of Grayson Mill Energy. The transformational $5 billion deal will significantly enhance the company's operations in the Williston Basin. It will increase the company's scale in the region while reducing costs, putting it in a stronger position to produce free cash flow at lower oil prices.
The Grayson Mill Energy transaction should be highly accretive for Devon Energy. It acquired the company at a 15% free-cash-flow yield based on an $80 oil price. It's still a very attractive acquisition at the current price point.
The highly accretive nature of the deal drove Devon Energy to significantly expand its share repurchase authorization. It increased the plan by 67% to $5 billion through the middle of 2026. That will give the company more capacity to buy back its cheap stock. Devon trades at about a 9% free-cash-flow yield at $70 oil following the Grayson Mill Energy deal. That's a discount of more than 50% to the S&P 500 and three times cheaper than the Nasdaq.
This high-quality oil stock is on sale
Shares of Devon Energy slumped last month due to lower oil prices. Because of that, the company trades at a bottom-of-the-barrel valuation, especially after closing its highly accretive deal for Grayson Mill Energy. The company can use its improved free cash flow from that transaction to buy back even more of its dirt-cheap shares, which should create a lot of value for its shareholders in the long run. It makes Devon a very compelling investment opportunity for those seeking a value play in the oil patch.
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
