With Oil Prices Stabilizing, Morgan Stanley Upgrades Devon Energy

Recent stabilization of the oil prices benefits companies like Devon Energy Corp DVN. upgraded the rating for the company from Equal-weight to Overweight, while raising the price target by 40 percent to $36.

Oil Price Stabilization

Analyst Evan Calio believes that the recent stabilization of the oil prices has the following impacts:

1. Increases the chances of success of asset sales
2. Allows the market to focus on “E&P future upside to medium-term commodity price recovery

These factors improve the relative risk-reward Devon Energy, Calio commented.

Morgan Stanley’s commodity strategist expect crude to remain in the range of $25-$45 per barrel. Calio added, however, that the longer-term outlook has improved in view of:

• Accelerating US declines
• Reductions in relative oil oversupply
• Lower negative crude demand

Why Devon Energy?

“Within E&Ps, we expect large cap “value” names to lead given their relative size in the broad value index sector,” the Morgan Stanley report noted. The analyst added that within this sub-segment, Devon Energy may outperform, given:

1. The shares have underperformed, with among the highest multiple compressions
2. The company has a path to de-lever in 2016 via asset sales, which would mitigate a primary overhang that resulted in pressure on its shares
3. Devon Energy has exposure to the STACK, “which we believe is one of the fastest improving unconventional plays.”

Devon Energy’s shares are likely to outperform, since the company has significant operating and financial leverage and “a deep unconventional drilling inventory,” Calio mentioned.