Time to Focus Energy Portfolios

 | Oct 04, 2013 | 7:30 AM EDT
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The energy sector is beginning to outperform the rest of the market, so pay no attention to all that fuss in Washington, hone your energy portfolio.

By concentrating on energy, we're not just going to randomly pick stocks for our portfolio to glide through the rest of this quarter in and into the first quarter of 2014. No, we are still following the rules for energy stock picking that have given us our far better than benchmark performance during the first three quarters of 2013 -- we're going to focus on domestic crude and natural gas liquids producers.

A bonus in this search would be a company that has gone under the radar and hasn't already spiked in price in 2013. Here's an idea that might just fit that bill -- Devon Energy (DVN).

It's no secret that CEO John Richels has tried hard to move Devon towards shale plays and NGL in the last three years. For much of its history in the 2000s, Devon was known as a natural gas company with limited crude engagement, except in a few choice assets in the Gulf of Mexico. But since it sold its Gulf assets in 2010 to BP and Apache, Devon has worked hard to move towards onshore crude production as fast as it can.

If you looked at the company's October investor presentation, you'd think that Devon is a crude producer primarily: Five of the first nine slides make note of the growth of the fine shale assets Devon is developing, particularly in the Permian/Cline area. The report crows loudly about the aggressive growth they are making in oil production, up 16% in 2013 alone. In one slide, the company even writes that in the Permian they are undertaking "no dry gas drilling".

Devon might like you to believe that it is an oil company, but it is not -- at least not yet. Despite its best efforts, Devon is still by-and-large a natural gas company, producing more than four times more gas as crude if measured in barrels of oil equivalent. It takes time to turn an aircraft carrier around in a canal. 

But the plus side of this is that the stock price has gone virtually untouched in 2013; it has miserably underperformed the rest of the energy sector, and particularly those liquids-rich exploration and productions we love to talk about. 

But there's also no doubt that this aircraft carrier is preparing to complete its slow and steady turn and is preparing to be rewarded for its diligence and vision. Devon is virtually the last company with proven reserves in the Permian basin not to have its potential recognized in its stock price. With other oil-rich plays in the Canadian Jackfish and Mississippi Lime adding to the turnaround, the question of a stock price closer to their previous 2011 high above $90 is not one of if, but when. With oil staying above $95 a barrel and the trajectory of oil production Devon is expecting, a large rally in the stock price is practically assured.

So the question becomes, "Is now is the right time to buy?"  I'm thinking that a $58 share price going into the fourth quarter is as good as any for starting a position, even if we don't expect a significant move for a quarter or two. But I've always thought that a low-priced starting base position makes buying more shares as the stock is rising far easier to do.

And that's how I think Devon will play out through 2014. Recommended.

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