Devon Energy: Buy, Sell, or Hold?

Devon Energy (NYSE: DVN) will not be the right choice in the energy patch for all investors. That is because of the type of company it is, sitting only in the upstream segment of the industry. However, more aggressive investors might actually find the company's industry position attractive. Here's why some people will love Devon, and why others will likely want to stay away.

Sell Devon Energy

The big problem that a lot of investors will have with Devon is that it is a pure play upstream energy producer. That means its main products are oil and natural gas. These are highly volatile commodities that go through harrowing price swings. Everything from supply/demand dynamics to geopolitical events can lead to large and often rapid ups and downs.

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DVN data by YCharts.

Rising energy prices will have a positive effect on Devon's revenue and earnings. Falling energy prices will have the opposite effect. Since investors are well aware of these facts, Devon's stock price will generally rise and fall along with the price of West Texas Intermediate (WTI) crude, a key U.S. energy benchmark.

Given that dynamic, conservative investors looking for energy exposure will probably be better off looking elsewhere. A good place to start would be companies like Chevron (NYSE: CVX) or ExxonMobil (NYSE: XOM), which are both integrated energy giants. They have more diversified businesses and, usually, more stable return profiles for investors (notably, both have increased their dividends for decades).

Buy Devon Energy

That said, what if you're looking to invest in energy in such a way as to leverage yourself to rising energy prices? That borders on market timing, which is a very difficult thing to do well. But Devon Energy would be a solid option if you have a constructive view of the energy market.

There are multiple reasons to like Devon Energy on this score. For starters, it has an investment grade-rated balance sheet, so it is financially strong enough to weather adversity. It has operations in five major U.S. energy-producing regions, providing at least a modicum of diversification. Its production is split fairly evenly between oil and natural gas, and the company has roughly a decade of land on which to continue drilling.

Basically, Devon is a financially strong company with a clear path for continued success. If you believe energy prices are likely to improve, it's a fairly safe way to back that belief without taking a flyer on a company that could end up in bankruptcy court if your expectation for higher energy prices falls flat.

Hold Devon Energy

Holding Devon Energy is a bit more nuanced. It does, clearly, appear to have the financial strength and business foundation to weather the ups and downs of the energy sector. Notably, it has paid some level of a dividend for a very long time, as the chart below highlights. While the dividend hasn't been consistent, the fact that one has been paid for so long speaks to Devon's strength as a company. In that regard, you could justify it as a long-term way to add more direct energy exposure to your portfolio (perhaps as a hedge to your real-world energy costs).

DVN data by YCharts.

There's another positive issue to consider here. Devon Energy has been acting as an industry consolidator, buying assets that are likely too small for energy industry giants like Exxon and Chevron to look at. However, given Devon's relatively small size, they are notable additions to its portfolio. That means Devon is both a survivor and a growing business at the same time.

Sticking it out through the energy cycle could be a solid choice, assuming you understand that energy downturns will lead to stock price declines. The key might be to view such downturns as opportunities to add more to the stock, if you like it enough to hold through the cycle.

Devon is not for the faint of heart

Devon Energy is by nature a volatile business and a volatile stock. Don't buy it if that is going to bother you. However, if you are looking for a way to invest in oil and natural gas, particularly in the U.S. market, it's a well-run company with a solid history of surviving the industry's inherent ups and downs. It is most appropriate for more active and more aggressive investors, of course, but it could easily fill the energy niche of a portfolio quite respectably -- if you're willing to accept the inherently volatile nature of its business.

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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.