We recently compiled a list of the 13 Best Commodity Stocks To Buy According to Analysts. In this article, we are going to take a look at where Devon Energy Corporation (NYSE:DVN) stands against the other commodity stocks.
Two major trends that are shaping commodity markets are the rising interconnection of the market and the increasing importance of power in the energy transition, as per a report. The link between necessary commodities for the energy transition, such as LNG and metals, grew to 56% in 2022-23, up from 27% in 2015-19. With the introduction of more than 100 new tankers in the previous three years, the supply of LNG is rising dramatically. By 2028, it is anticipated that there will be more LNG carriers than oil carriers. Flexible contracts and increased competition between Europe and Asia are the main causes of this change.
Moreover, estimates suggest that power will play a larger part in the energy transition by 2040, contributing between $1.3 trillion and $2.4 trillion, expanding at a rate of up to 5% annually. Since renewable energy is predicted to account for the majority of the power mix between 2030 and 2050, significant investments in transmission networks, flexible power assets, and renewable energy sources will be required to meet net-zero targets. Up to 50% of the steel, copper, and aluminum needed for production will come from wind turbines alone.
Meanwhile, it is becoming more difficult to reduce inflation as global commodity prices level off, according to the World Bank’s April 2024 Commodity Markets Outlook. The price decline from mid-2022 to mid-2023 was 40%, but it has since stabilized. However, since the middle of 2023, indices of commodities prices has largely not altered. The World Bank projects that global commodity prices will fall by 3% in 2024 and 4% in 2025, assuming that geopolitical tensions do not flare up again. Inflation will continue to rise above central bank targets despite this modest decline as per the report World Bank.
Oil prices are still high as the world economy is going down; Brent crude is expected to average $84 a barrel by 2024, as per the World Bank. Prices might rise above $100 in the event of global upheaval, providing investors in oil substantial profits. Secondly, due to geopolitical uncertainty and the robust demand from central banks in developing countries, gold is predicted to reach record highs in 2024. This confirms gold’s reputation as a “safe haven” asset in times of market volatility.
Moreover, the demand for metals like copper and aluminum is being driven by investments in green technologies. Already at a two-year high, copper prices are predicted to grow by 5% in 2024, while aluminum prices are forecasted to rise by 2% due to rising demand for renewable energy infrastructure and electric vehicles.
On the other hand, a report from a large US bank stated that, in May, commodity prices reached all-time highs, driven by increases of 74% in only 1.5 months for U.S. natural gas, copper, gold, and cocoa. A retreat in June was brought on by profit-taking and worries about the U.S. economic slowdown. By year’s end, Natasha Kaneva projects a 10% growth in the commodity market, citing weather-related supply chain disruptions and favorable fundamentals that might raise the price of gas, oil, and agricultural products. Energy transition commodities may see more gains from China’s decarbonization initiatives, and gold prices may reach $2,600/oz by 2025 as a result of Fed rate cuts and central bank easing.
Methodology:
We sifted through holdings of commodity ETFs to form an initial list of 20 commodity stocks. Then we selected the 13 stocks that had the highest upside potential based on analysts’ consensus. We have only included stocks in our list with an upside potential of 30% or higher. The stocks are ranked in ascending order of the upside potential.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
A group of technicians in hazmat suits inspecting a natural gas storage tank.
Devon Energy Corporation (NYSE:DVN)
Upside Potential: 41.62%
Devon Energy Corporation (NYSE:DVN) is a gas and oil firm that owns land in a number of the top US shale plays. Its production is primarily derived from the Permian Basin, but it is also significantly present in the Bakken, Anadarko, and Eagle Ford basins. Devon reported net proven reserves of 1.8 billion barrels of oil equivalent at the end of 2023. In 2023, net production was approximately 658,000 barrels of oil equivalent per day on average, with 27% being natural gas and 73% being oil and natural gas liquids.
Following a series of effective capital allocation decisions in 2018, Devon sold its investment in Enlink Midstream, sold off its Canadian heavy oil and Barnett Shale businesses, and merged with WPX. Following these clever moves, the firm was able to recycle cash by selling off noncore or higher-cost businesses. It made a significant turn toward the Delaware and gained fresh exposure in the Bakken through recycled funds. Its production was previously 40%-50% comprised of Barnett Shale and Canadian heavy oil.
Devon has strategically placed properties in the heart of the basins in which it operates. Competitive supply costs and above-average performance are correlated with attractive acreage.
DVN is also one of the “10 Stocks That Have Jim Cramer’s Attention”. In a recent commentary, Jim Cramer stated the following regarding DVN:
“I like Devon Energy, especially considering its strategic acquisitions. However, with natural gas prices low and oil prices struggling to stay above $60, don’t get overly excited about the stock’s immediate prospects.”
The firm had a successful second quarter of 2024 due to record oil production and efficient cost control. A record 335,000 barrels of oil were produced every day, with the Delaware Basin accounting for 66% of the total volume produced in Q2 2024. Devon Energy Corporation (NYSE:DVN) also increased its output estimate for the entire year from 655,000 to 675,000 barrels of oil equivalent per day (boepd) to 677,000-688,000 boepd.
Hence, there are 16 analysts who have collectively rated the stock as a “buy.” The average price objective of $58.63 indicates a possible gain of 41.62% from the current stock price.
Overall DVN ranks 5th on our list of the best commodity stocks to buy according to analysts. While we acknowledge the potential of DVN as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than DVN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.