AGNICO EAGLE vs. DEVON ENERGY - Which is a better investment?
Summary
TLDRThis video explores whether Devon Energy (ticker: DVN) is a worthy investment, highlighting the current underinvestment in oil, the arbitrage opportunity in gas prices between the US and Europe, and the upcoming Mata Horn pipeline's impact on Devon's revenue. The presenter emphasizes Devon's strong financials, insider ownership, and valuation, comparing it favorably to a gold producer, suggesting Devon is significantly undervalued. With a PE ratio of 8.74 and a price-to-cash-flow ratio of 4.44, the video concludes with a strong buy recommendation, despite acknowledging the volatility and potential political risks associated with the oil and gas sector.
Takeaways
- 📈 Devon Energy (ticker: DVN) is under consideration for investment due to its trading on various exchanges and current market conditions.
- 💰 A lack of worldwide investment in oil is leading to high oil prices, which could benefit oil and gas companies like Devon.
- 🌍 The significant price difference between natural gas in Europe and the US, along with the construction of infrastructure to transport gas, could increase Devon's profitability.
- 🚀 The upcoming commissioning of the Wink to Webster pipeline will likely increase Devon's revenue by providing a market for surplus gas production.
- 💼 Devon is investing in its business to maintain or grow production, which is a positive sign for future profitability and cost reduction.
- 🤵 Insider ownership at Devon is substantial, indicating alignment with shareholder interests and a potential commitment to the company's success.
- 💸 Devon is currently trading at a low valuation, which could make it an attractive investment opportunity.
- 📉 Devon has a low tax rate compared to other industries, which can positively impact shareholder returns.
- 🔄 The company has been reducing its share count through buybacks, increasing the ownership percentage for existing shareholders.
- 💰 Devon is returning significant capital to shareholders through dividends and share buybacks, supported by a strong free cash flow.
- 🏦 Devon operates in a safe jurisdiction (USA), which reduces geopolitical risks compared to companies operating in multiple countries.
Q & A
What is the ticker symbol for Devon Energy in the US stock market?
-Devon Energy trades under the ticker symbol DVN in the US stock market.
Why is there a lack of investment in the oil industry worldwide?
-The oil industry, including state-run oil companies, is underinvesting, which is likely due to various factors such as market conditions, regulatory pressures, and shifts towards renewable energy sources.
What is the current price difference between natural gas in Europe and the US?
-Currently, a million BTU of natural gas in Europe is selling for about $9, while the Henry Hub spot price for natural gas in the US is about $2 per million BTU, resulting in a $7 difference.
What is the significance of the Matterhorn pipeline for Devon Energy?
-The Matterhorn pipeline, which is being built to transport gas from West Texas and East New Mexico to the Houston area, is significant for Devon Energy because it will allow them to sell excess gas at a higher price, thereby increasing their revenues. Devon is also a partial owner of the pipeline.
How is the US business and industry conversion to gas expected to benefit Devon Energy?
-As businesses and industries in the US convert their operations to use gas due to its low cost, this creates extra demand for gas, which benefits Devon Energy, a significant producer of gas.
What potential political catalyst is mentioned in the script that could positively impact Devon Energy's share price?
-A potential political catalyst mentioned is the possibility of Republicans winning in 2024, which could lead to higher valuations for US oil and gas producers in the market.
Why is Devon Energy's insider ownership considered a positive factor for investors?
-Devon Energy's heavy insider ownership, with executives and directors owning shares equivalent to 10 times their annual salary plus bonuses, aligns management's interests with shareholders, potentially leading to better decision-making for the company's future.
What is Devon Energy's dividend policy in terms of allocating free cash flow?
-Devon Energy's dividend policy involves allocating 30% of their free cash flow towards strengthening the balance sheet or paying down debt, and 70% towards a fixed dividend, a variable dividend, and share buybacks.
How has Devon Energy's share count changed in the last three years?
-In the last three years, Devon Energy has retired about 6% of their outstanding shares, increasing the ownership stake of existing shareholders without the need to purchase additional shares.
How does Devon Energy's tax situation compare to that of a Canadian gold producer?
-Devon Energy's average income tax rate is about 20%, which is lower compared to the 30% to 40% average income tax rate for a Canadian gold producer. Additionally, US investors in Devon Energy may benefit from tax advantages on dividends compared to those investing in Canadian companies.
What is the comparison between Devon Energy and Agnico Eagle Mines in terms of market cap and enterprise value?
-Both Devon Energy and Agnico Eagle Mines have similar market caps of $29 billion and $32.6 billion respectively, and enterprise values of $34.5 billion and $34 billion respectively, indicating that investors are paying a comparable price for shares in both companies.
Why is Devon Energy considered to be a better investment compared to Agnico Eagle Mines based on the financial numbers presented?
-Devon Energy has significantly higher revenues, gross profit, operating income, and net income compared to Agnico Eagle Mines, despite both companies having similar market caps and enterprise values. Devon also has a lower tax rate and has been growing its retained earnings, which can be reinvested into the business.
What is the current price-to-earnings ratio for Devon Energy, and how might it change with expected cost reductions in 2024?
-The current price-to-earnings ratio for Devon Energy is 8.74. With expected cost reductions of about 10% in 2024, earnings are likely to increase, which could lower the price-to-earnings ratio if the stock price remains the same.
What is the risk level assigned to Devon Energy, and what factors contribute to this assessment?
-The risk level assigned to Devon Energy is a four out of ten, considering factors such as the current good valuation, potential volatility in oil and gas stocks, and possible future political or tax-related risks.
What is the final verdict on Devon Energy as an investment according to the script?
-The final verdict on Devon Energy as an investment is a 'strong buy', based on the company's incredible valuations, potential for good returns over a few years, and the positive factors discussed in the script.
Outlines
📈 Investing in Devon Energy: A Potential Buy?
The script opens with an introduction to Devon Energy, a company traded under the ticker DVN, and emphasizes the need for personal research before investing. It discusses the current investment climate for oil and gas, citing reasons such as underinvestment in the industry, price arbitrage between the US and Europe, and the construction of the Matterhorn pipeline. The script also mentions the potential impact of political changes on oil and gas valuations. Devon Energy is highlighted for its investment in future growth, cost reduction forecasts, and insider ownership aligning management and shareholder interests.
💼 Devon Energy's Financial Strengths and Tax Advantages
This paragraph delves into Devon Energy's financial position, comparing it favorably to a Canadian gold producer in terms of tax rates and dividend taxation for American investors. It underscores Devon's share repurchase activities, which have reduced the share count and increased shareholder ownership. The company's dividend policy is explained, which allocates a portion of free cash flow to a fixed dividend, variable dividends, and share buybacks. The script also contrasts Devon's operations in the US with those of a gold company operating in Canada, highlighting Devon's safe jurisdiction and valuation metrics compared to the gold company.
📊 Financial Comparison: Devon vs. Agnico Eagle
The script provides a detailed financial comparison between Devon Energy and Agnico Eagle Mines, demonstrating Devon's superior revenue, gross profit, operating income, and net income despite similar market capitalization and enterprise value. It discusses tax rates, showing Devon's lower tax burden over the past four years, and examines cash flows, free cash flows, and the amount returned to shareholders through dividends and share buybacks. The comparison also touches on debt levels, interest coverage ratios, and debt maturities, presenting Devon's financial health and growth potential.
🏆 Devon's Retained Earnings Growth and Return on Capital
This paragraph focuses on Devon's retained earnings growth and return on capital, showing a positive trend for Devon compared to Agnico Eagle's negative retained earnings in recent years. It argues that Devon's higher retained earnings enable further business growth through reinvestment. The return on capital for Devon is significantly higher than Agnico Eagle's, indicating a more efficient use of capital. The script concludes by reiterating Devon's strong valuation and the presenter's 'strong buy' recommendation, while also discussing the potential risks associated with investing in oil and gas stocks.
Mindmap
Keywords
💡Devon Energy
💡Cash Flows
💡Valuation
💡Gas Price Arbitrage
💡Waha Pipeline
💡Insider Ownership
💡Tax Rates
💡Share Repurchase
💡Dividend
💡Market Cap
💡Enterprise Value
💡Retained Earnings
💡Return on Capital
Highlights
Devon Energy is analyzed for investment potential, trading under the ticker DVN in the US.
Global underinvestment in oil is leading to high prices, creating an opportunity for oil and gas companies.
Gas price arbitrage between the US and Europe is highlighted, with infrastructure being built to bridge the gap.
The Matterhorn pipeline's impact on Devon's revenue is discussed, as it will alleviate gas production surplus in West Texas and New Mexico.
Devon's business strategy includes investing to maintain or grow production, unlike some companies that cannibalize their business by not reinvesting.
Devon forecasts a 10% reduction in costs for 2024, potentially increasing income and dividends.
Insider ownership at Devon is significant, aligning management decisions with shareholder interests.
Devon is considered undervalued, offering a compelling investment opportunity.
Devon benefits from low tax rates and favorable tax treatment for US investors compared to Canadian gold producers.
Devon has been retiring shares, increasing the ownership percentage for existing shareholders.
Devon returns significant capital to shareholders through share buybacks and dividends.
Devon operates entirely in the USA, providing a safe jurisdiction for production.
A comparison with Agnico Eagle Mines shows Devon's superior financial performance and valuation.
Devon's retained earnings are growing, allowing for reinvestment and business growth.
Devon's return on capital is significantly higher than Agnico Eagle's, indicating better capital efficiency.
Devon's debt is substantial but manageable due to strong cash flow and long debt maturities.
The investment verdict for Devon Energy is a 'strong buy' based on current valuations and future potential.
Transcripts
today we're going to dig into Devon
energy to find out whether it's a buy or
not it trades on many exchanges around
the world but in the US it trades under
the ticker
dvn as always don't take this as
investment advice and always do lots of
your own research before investing any
of your money in a little bit we're
going to talk about Devon's cash flows
and Devon's valuation and I think that's
going to blow you away but first let's
talk about why invest in oil and gas
right now first up is lack of investment
worldwide in oil the industry including
the state-run oil companies are
underinvestigated
ly to remain high next you have the gas
price Arbitrage right now a million btu
of natural gas in Europe is selling for
about $9 in the US the Henry hub spot
price for natural gas is about $2 per
million btu so you have a $7 difference
between the US and Europe and you know
what the infrastructure to get the gas
from the US to Europe is being built
right now and as we start selling more
natural gas in Europe the price of gas
in Europe will go down and the price of
gas in the US will go up which will
benefit a US producer like Devon and
next in the oil and gas space you have
incredible valuations at least in the US
and Canada and we're going to get to the
valuation of Devon here in a little bit
and then you have the matter horn
pipeline that's being built and it's
going to be commissioned in quarter 3 of
2024 so very very soon and this is a
pipeline that goes from like East New
Mexico or west Texas to the greater
Houston area or the Katy Texas area and
the reason this is important is because
Devon is a big producer in the west
Texas and East New Mexico area and there
is too much gas being produced there so
much in fact that they have to burn a
lot of the gas that's being produced
because they have nowhere to send it
however after this matter horn pipeline
is built they'll be able to send a lot
of it to Houston and they'll get a much
higher price for that because actually
West Texas natural gas is selling for a
lower price right now than the Henry hub
spot price so that matter horn pipeline
should bring revenues up for Devon and
as a matter of fact Devon is a partial
owner of the matter horn Pipeline and
the next reason to invest in a company
like Devon or in the oil and gas space
is that businesses and Industry in the
US is converting to gas so this is
especially going to help a company like
Devon who has a lot of exposure to gas
right now they're making most of their
Mone money from oil because the gas
prices are so low however you have all
this industry and all these businesses
that are converting their operations to
gas because gas is so cheap right now so
this is creating a lot of extra demand
that's happening right now and next we
have a potential political Catalyst and
that is if the Republicans win in
2024 I think oil and gas producers in
the US will be valued higher in the
market so that could have a positive
impact on the share price this year and
now why we might want to invest in Devon
energy first of all they're investing
enough to maintain or grow production a
lot of these oil and gas companies
aren't reinvesting enough in their
business and they're actually
cannibalizing their business you'll see
some oil and gas companies especially
the state-owned companies paying crazy
high dividends but they're only able to
do that because they're not reinvesting
in their own business and reinvesting
for the future and because of this lack
of investment you want a company that's
investing for the future so you can take
advantage of those future high prices
and Devon is forecasting that they're
going to be able to reduce costs by 10%
in 2024 and when you can maintain
production while at the same time
decreasing your cost by 10% that adds a
lot of extra income to your bottom line
and when you have a higher number on
your bottom line that means more
dividends and more share BuyBacks the
next reason is Devon has heavy Insider
ownership between the executives and the
directors almost all of them own like 10
times their annual salary plus bonuses
in shares and 10 times their annual
salary well that's pretty rare to see
but that's a very good thing because
that means that when management makes
decisions you know that it's going to be
in the best interest of the shareholder
whereas a lot of times when the top
management doesn't own much stock
they're making decisions that are in
their best interest not in the
shareholders best interest the next
reason we might want to buy Devon today
is because it's super cheap and we're
going to get into the valuation here in
a little bit and also you have low tax
rates Devon's average income tax each
year is about 20% whereas for example if
you invest in a Canadian gold producer
that average income tax rate is going to
be 30% or 40% and in addition to this at
least for me as an American I have an
advantage because when Devon pays out a
dividend I'm not necessar L taxed on
that if I hold that in a tax deferred or
a tax-free account I'm not taxed on that
dividend and also for lower earners in
the US if between you and your spouse
you make less than $889,000 in a year
total you're not taxed on any dividends
at all but let's say you own a Canadian
gold company and that company pays a
dividend as an American you're
automatically taxed 15% the moment that
dividend is paid even if you hold it in
a tax-free account and even if between
you and your spouse you have a low
income you're still tax that 15% and you
can't avoid it so that's something to
consider as well if you're considering
buying a Canadian gold company versus a
US oil and gas company well you're going
to have a better tax situation for the
US oil and gas company at least if
you're an American like me but I know a
lot of you watching are from all around
the world and I don't know your personal
tax situation the next reason to buy
Devon is we have a decreasing share
count in approximately the last three
years Devon has retired about 6% of
their outstanding shares so every year
that you're a shareholder of Devon
without buying any more shares at all
you become a bigger owner of the company
each year as more and more share
repurchases happen and also on that note
Devon is returning a lot of money to
shareholders and they're doing that in
two ways number one they're buying back
shares and number two they're paying a
nice dividend now they have this
dividend policy where they have a fixed
dividend and a variable dividend they
take their free cash flow and they take
30% of their free cash flow and that
goes towards strengthening the balance
sheet or paying down debt and then they
take 70% of the free cash flow and that
goes to the fixed dividend the variable
dividend and share BuyBacks so from that
70% of free cash flow they pay the fixed
dividend first so you can look forward
to getting at least 22 cents per share
per quarter because that's that's a
fixed dividend and then depending on
whether they think their company is
undervalued or not they pay a variable
dividend or they buy back shares or a
combination of the two so some years
this dividend is going to be huge and
then other years we're going to see the
share count drop a lot because the
company is generating a ton of cash so
they have a lot of money to return to
shareholders and another reason you
might be interested in purchasing Devon
shares is they operate in a safe
jurisdiction 100% of their production
comes from the USA on this channel I
talk a lot about gold and precious
metals so I want to compare Devon to a
similar company in the gold space Devon
operates exclusively in the US so they
operate in a safe jurisdiction whereas
agnico Eagle mines operates mostly in
Canada so ago Eagle is in safe
jurisdictions as well and then in terms
of the company valuation the market cap
29 billion for Devon 32.6 billion for
ago Eagle Enterprise Value 3 4.5 billion
for Devon 34 billion for agnico Eagle
One thing I see beginner investors
getting confused about is thinking that
because one company's share price is
lower well then that company is cheaper
but that's not the case because it
depends how many shares you have
outstanding so Devon you're paying a
little over $47 a share and ano Eagle a
little over $65 a share but in terms of
market cap or Enterprise Value they're
almost exactly the same considering
you're paying the same price whether you
buy Devon or ago Eagle let's look at
some Financial numbers from the
companies to see what you're getting for
that money and by the way even though
I'm going to be picking on agnico Eagle
here it's not because I think it's a bad
company in fact I think it's a very good
company I think it's a very good gold
producer but I want to give you this
comparison because that is a super
popular company to own in the gold space
it's one of the most recommended
companies you'll hear it's one that's in
every one of the funds every one of the
mutual funds every one of the ETFs it's
all over the place because it's a very
good company but I want to make this
comparison to show you just how cheap
Devon is first up is revenues in the
blue column here we have Devon in the
black column we have ago Eagle in terms
of revenues in the last 12 months Devon
has earned 2.1 times the amount of
Revenue that AO eagle has earned but
that doesn't take into account how much
it cost each company to get the
resources out of the ground so next
gross profit so this is revenues minus
what it cost to get it out of the ground
and Devon has about double the gross
profit of agnico eagle and next up we
have operating income so this is gross
profit minus basically what it costs to
run the business and in this case Devon
is almost three times that of anniko
eagle and keep in mind you're paying
almost the exact same price to buy
shares of Devon as you are to buy shares
of agnico Eagle but you're getting three
times the operating income buying Devon
and then it's also worth looking at the
tax so these are the tax rates for Devon
andiko Eagle going back four years so
for Devon we have 18% 2% 22% 18% for
igno Eagle we have 33% 40% 40% 18% so
igno Eagle is usually in the 30 to 40%
range and Devon usually hovers right
around 20% and the taxes are taken from
the operating income so the taxes affect
your bottom line a lot and now we have
the net income in the past 12 months for
each company agnico Eagle is way down
here at 472 million and Devon is way up
here at almost 3.4 billion in terms of
after tax income Devon shareholders
earned 7.2 times that of a niku eagle
shareholders now it's worth mentioning
that in the past year the oil price has
only gone up a little bit whereas the
gold price has gone up 15 or 20% so
maybe a year from now maybe it's not 7.2
times maybe it's six times or maybe it's
five times but even if anniko Eagle
grows her revenues by 20% grows her
operating income by 20% well Devon's
after tax earnings should far exceed
that of ago Eagle despite a higher gold
price and now we still have the same two
companies but we're looking at cash
flows so this is cash from operations
Devon anniko Eagle Devon has 2. four
times the amount of cash from operations
remember you're paying the same price
for each company and next we have free
cash flow that's what we just saw cash
from operations minus capex so capex is
going to be what it cost to maintain
production and what it cost to grow
production and Devon earned 2.6 times
the amount of free cash flow as igno
eagle and this is how much money is
being returned to shareholders now these
bars are negative because it's a cash
outflow because it's going back to
shareholders so here in this column we
have Devon's share repurchases of about
720 million here we have Devon's
dividends paid of over 1.5 billion here
we have ago Eagle share repurchases of
about 50 million and here we have ago
Eagles dividends of 640 million and
remember this is the same size of
company and Devon returned 2.3 billion
to shareholders while anniko Eagle
returned $700 million to shareholders
this is one thing where anniko eagle has
Devon beid and that is the total amount
of debt so Devon has about $5.7 billion
of long-term debt whereas ago eagle has
1.7 billion so Devon has 3.3 times the
amount of debt however when you compare
the amount of debt to the amount of cash
flow each company is making well it's
actually not so bad Devon's debt doesn't
look that bad and here we're going to
see that so this is the cash from
operation
divided by the interest expense for each
company so on this chart the higher the
number the better so here we have the
most recent year and Devon had about 18
times interest coverage ratio whereas
Aiko Eagle had 26 times so even though
Devon's debt is way
higher their interest coverage ratio is
not that much lower because they're
generating a lot of cash and I thought
this was interesting to look at this is
Devon's debt maturities so they have
$5.7 billion in debt however almost
three billion of that doesn't mature
until after 2040 so they have very long
Daya maturities and they don't have to
pay back a lot of this debt for a long
period of time and their average
interest rate is only a bit over 5% so
their average interest rate is pretty
darn low which is why their interest
coverage ratio is so high even though
they do have quite a bit of debt so to
me their debt really isn't a concern and
this is interesting to me this is
retained earnings so this is taking your
earnings subtracting how much you return
to shareholders in the form of BuyBacks
and dividends and this is what's left
this is the year 2020 2021 22 and 23
well in these three years ago Eagle was
negative but you can see that Devon is
growing their retained earnings every
single year and this doesn't mean that
they had 6.2 billion dollar in the most
recent year because it takes this year
and it adds about another two billion in
retained earnings going from 4.3 billion
to 6.2 billion now igno eagle has been
negative for 3 years and then finally in
2023 they jumped up into the positive
but because Devon has more retained
earnings that means they can reinvest
more money into their business to
continue growing their business and this
is another way to look at which 1 is a
better company and these are each of the
companies return on Capital so this is
2021 22 and 23 in the most recent year
Devon had a return on capital of 24%
whereas igno Eagle was about
55% Devon's return on Capital was 4.4
times better than ago Eagles and despite
all these facts here remember ago Eagle
is not a bad company anniko Eagle mines
is a very good company it's just that
Devon is that much better
and Devon is that much cheaper I'll get
to my conclusions for this investment in
just a moment but I want to let you know
that in the past few days I'm seeing
some of the best valuations in the
natural resource sector that I've seen
in a very long time but you got to make
sure you're investing in the right
stocks and you got to make sure that
you're following those very very closely
so in my newsletter I share with you
what I'm putting my own money in and I
tell you what I'm doing before I buy or
sell anything so if you're interested in
that go to Mining stock monkey.com
produv and that'll take you right there
or you can click on this link right up
here the price is going up on July 1st
but anyone who signs up before then and
stays subscribed gets that price forever
so now let's talk about my conclusion
for this investment the price to
earnings ratio right now is at
8.74 however costs are coming down by
about 10% in 2024 so I expect earnings
to increase which will bring down the
price to earnings ratio if the stock
price were to stay the same but as
earnings increase usually the stock
price goes up as well and then you have
a price to cash flow of just
4.44 price to cash flows like this are
typically reserved for declining
Industries however I don't think this is
a declining company because they're
reinvesting enough to maintain or grow
production yes the politicians are
saying we're going to put you oil
companies out of business in 2030
and by 2030 everybody's going to be
driving electric cars and internal
combustion engines won't exist but I
don't believe that I don't believe the
politicians and I believe that at some
point in the future that perception is
going to change once people realize how
wrong these politicians are and now we
have the risk level so one being the
least risky 10 being the most risky a
big part of the risk level is buying at
a good price like if you buy a great
company but you pay a really high price
well your risk level could be a 10
because if you're buying in a bubble
well that's very very risky however here
you're buying when the valuations are
actually quite good I am adding a
certain level of risk for this because
these oil and gas stocks do tend to be
pretty volatile and they could also be
the victim of higher taxes like in the
form of a windfall profit tax or
something like that in the future if oil
prices were to go way up so for those
Reasons I'm putting the risk level at a
four so overall this is a pretty safe
investment in my book but keep in mind
these oil and gas stocks are very
volatile so this stock price could
easily go down by 30% over the next year
or so and today the stock price is
sitting somewhere around $47 a share and
my verdict between sell hold buy or
strong buy I'm giving this a strong buy
I think these are incredible valuations
today and if if you buy today and hold
for a few years I think you're going to
see very very good returns if you're
interested in my newsletter click on
this link right here and sign up before
the price goes up on July 1st and next
watch this video it's my analysis of B2
gold and I'll see you over there
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