Devon Energy: Buy, Sell, Or Hold?

Devon Energy (NYSE: DVN) is a fairly easy company to understand. However, how it fits into a portfolio can be a bit more complicated to figure out. For some investors, it will be a buy, while others will see it as a sell, and a few might like to hold it for the long term. And every single one of them might be right in their assessment of the stock.

Here's why Devon Energy could be a buy, a sell, and a hold -- all at the same time.

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Buy Devon Energy

There are a lot of positives when it comes to Devon Energy. For example, it is one of the largest independent onshore U.S. oil and natural gas exploration companies. It is financially strong, with an investment-grade-rated balance sheet. It has a low break-even point, so it can turn a profit even when oil prices are modest. And it has over a decade of land on which to drill new wells.

In fact, Devon Energy just completed the purchase of additional onshore U.S. assets in the second half of 2024. This is notable because it shows that Devon Energy not only has a solid business foundation, but it has the capacity to expand via acquisition as well. Effectively, it can act as an industry consolidator with regard to assets that would likely be too small for energy industry giants like ExxonMobil or Chevron. So it is a good company with multiple opportunities to improve over time.

If you want to invest in the U.S. onshore space, Devon Energy is a good way to do just that.

Sell Devon Energy

The problem with this thesis is that it doesn't take into consideration one of the most important factors in the energy sector: oil and natural gas prices. These commodities are highly volatile and can swing both dramatically and quickly. Given that Devon Energy's top- and bottom lines are tied directly to the price of oil and natural gas, the company's performance can be highly volatile. That, in turn, means the stock price can be highly volatile.

This stands in stark contrast to industry giants like Exxon and Chevron, which purposely own assets across the energy landscape, from the upstream (production) through the midstream (pipelines) and into the downstream (chemicals and refining). This level of diversification helps to soften the swings experienced by upstream-focused companies like Devon Energy.

All this doesn't mean that Devon Energy is a bad company -- far from it. It just means that conservative investors looking for energy exposure may be better off with a different stock. Owning Devon Energy will probably keep you up at night when oil prices are plunging.

Hold Devon Energy

The buy thesis is likely to be strongest among investors who have a positive outlook for oil and gas prices. The sell thesis, likewise, is likely to be strongest among investors who have a negative outlook for oil and gas prices.

The hold thesis is a bit more nuanced. Remember the acquisition in the second half of 2024, which comes on the heels of a purchase made in 2022.

The capacity that Devon Energy has to act as a consolidator isn't simply a theoretical construct. The company is actively working to grow by buying complementary assets. This means that over time this upstream-focused producer is expanding its business. If you want to benefit from that effort, you'll want to buy and hold the stock over the long term.

In fact, industry downturns could actually turn out to be buying opportunities to either establish a position or to expand the position you already have in your portfolio. And such industry pullbacks, notably, could help to set up further acquisitions, since a downturn is when weaker drillers might need to sell their businesses.

WTI Crude Oil Spot Price data by YCharts

To be fair, there will be points in time when holding on to Devon Energy's stock will be hard to do. But, historically speaking, oil prices have always recovered eventually, even after particularly shocking price declines like the one that took place during the early days of the coronavirus pandemic. This is not a stock for the faint of heart, but if you have the stamina, it could be a solid long-term hold if you want exposure to the onshore U.S. drilling sector.

The future will be volatile

There's only one thing that is certain about Devon Energy's future: It will be volatile. That's just how things work in the upstream segment of the broader energy sector. That fact isn't really good or bad, but it does materially impact how investors should think about buying, selling, or holding Devon Energy.

All in, it is a well-run company with both internal and external growth opportunities, but oil prices will heavily influence the day-to-day price movements of the stock. If you can come to grips with all this aspect, it could be just the investment you are seeking.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.