Why Devon Energy stock fell nearly 13% in September

Actions of Devon Energy (DVN 3.19%) fell 12.6% in September, according to data provided by S&P Global Market Intelligence. The culprit was the drop in oil prices. This offset the positive effect of closing a needle moving purchase.

Down, despite being big

Oil prices came under pressure again last month. WTI, the main benchmark for US oil prices, fell another 7.3% in September, ending the month at around $68 a barrel. It is now down 16.4% in the last quarter.

The main factor is the potential for new supply growth later this year, if OPEC ramps up production in December as planned. That potential increase in production is coming at a given time when demand concerns grow due to a possible global economic slowdown. Low oil prices would affect the cash flows of oil stocks like Devon, which is why he was under pressure last month.

Falling crude prices overshadowed some notable news from Devon last month. The oil company has completed its strategic acquisition of Grayson Mill Energy. The $5 billion transformational agreement will significantly enhance the company’s operations in the Williston Basin. It will increase the company’s size in the region while reducing costs, putting it in a stronger position to generate free cash flow at lower oil prices.

The Grayson Mill Energy transaction should be very attractive to Devon Energy. Acquired the company at a free cash flow yield of 15% based on an oil price of $80. It still is a very attractive purchase at the current price.

The highly attractive nature of the transaction prompted Devon Energy to significantly expand its share repurchase authorization. It raised the plan by 67% to $5 billion by mid-2026. That will give the company more ability to buy back its cheap stock. Devon is trading at a free cash flow yield of about 9% at $70 oil following the Grayson Mill Energy deal. That’s over 50% off at S&P 500 and three times cheaper than Nasdaq.

This high quality oil stock is on sale

Shares in Devon Energy fell last month on low oil prices. Because of this, the company is trading at a bottom-barrel valuation, especially after closing its highly profitable Grayson Mill Energy deal. The company can use its improved free cash flow from that deal to buy back even more of it cheap stock that should create a lot of value for its shareholders over the long term. It makes Devon a very compelling investment opportunity for those seeking a value play in the oilfield.