Analysis: Spinning assets into partnership may not solve Devon's woes

Fri Jun 7, 2013 5:14am EDT
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By Anna Driver and Michael Erman

HOUSTON/NEW YORK (Reuters) - Devon Energy Corp's (DVN.N: Quote) latest bid to revive interest in its stock may take a page out of the activist investors' playbook, but Wall Street continues to look elsewhere for returns in the energy patch.

The Oklahoma City-based company said on Thursday it would transfer some assets into a publicly traded master limited partnership. The move, the latest in a four-year long effort to transform the company, was greeted by a yawn from investors who sent Devon shares lower on a day the overall market went up. That reaction symbolizes the rough ride the stock has taken in the past few years.

Starting in 2009, Devon decided to tighten its focus on North American drilling by selling off its international and offshore assets, a strategy that many of its competitors have since followed.

The move hasn't paid off for Devon. The company's shares have fallen about 30 percent over the last two years compared with a 25 percent gain in the Standard & Poor's 1500 index.

"They made strategic moves that did not work for them," said Fadel Gheit, oil analyst at Oppenheimer. "At the time, it seemed a good thing to do."

While the company's oil production is growing, about 60 percent of its output in the second quarter was natural gas, a commodity that fell to the lowest price in a decade about a year ago. Since then, natural gas has rebounded to around $4 per million British thermal units, but that price is still considered too low to be profitable in many fields.

Peers like Apache Corp (APA.N: Quote) and Hess Corp (HES.N: Quote), which also trade with valuations that are at a discount to peers, are seen to have more options and higher exposure to oil. For example, Hess is in the process of selling its retail division and Apache initially plans to sell $4 billion in assets this year.

"I think the catalyst to make the change at Devon is just not that obvious," said a senior energy investment banker.   Continued...