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Gold/Mining/Energy : ENERGY EXPLORATION & PRODUCTION

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To: Dennis Roth who wrote (18)	11/8/2007 8:04:14 AM
From: Dennis Roth	Read Replies (1) of 111

Devon Energy Corp. (DVN): Stock trades below peers despite 'best of' North America portfolio - Goldman Sachs - 11/08/07 What's changed Devon reported 3Q 2007 adjusted EPS from continuing operations of $1.35 versus our $1.38 and First Call consensus of $1.40. Operating cash flow was $1,454 million versus our $1,413 million estimate. Management raised production guidance for 2007 and kept guidance flat in 2008. Our 2007/2008 EPS is $6.25/$9.86 from $6.26/$10.25. Implications We believe Devon’s portfolio represents a “best of” among North American assets – exposure to the core Barnett Shale, the emerging Lower Tertiary play in the deepwater Gulf of Mexico and to oil sands in Canada via the Jackfish in-situ oil sands project. We believe these projects combined with new production in Brazil should lead to strong free cash flow and returns over the coming years. We are assuming production towards the upper end of management’s guidance range in 2008 and see 6%-9% production growth through 2010. We believe the company is likely to reach 1 Bcfe/d in the Barnett in 2H 2008, earlier than guidance. Valuation Devon’s growth rate is not unique versus its peers, but it does have higher return on capital employed and low free cash yield versus peers. Devon (Not Rated) trades at 5.2x 2008 EV/debt-adjusted cash flow versus 5.8x for Anadarko Petroleum, 5.5x for Apache, 5.3x for Chesapeake Energy, 5.6x for EOG Resources, 7.1x for XTO Energy and 7.5x for EnCana. The comparison with Anadarko (Sell rated) is most stark, as Anadarko and Devon have similar exposures to onshore gas and the deepwater (Anadarko does not have oil sands exposure). We do not believe Anadarko deserves to trade at a premium to peers. Key risks Commodity price volatility, drilling results, cost pressures and government pronouncements are key risks.

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