Devon Shows Occidental How To Buy

The merger between Devon (DVN) and WPX Energy (WPX) offers a marked contrast to Occidental’s (OXY) ill-fated acquisition of Anadarko. Synergies are coming from cost savings not revenue opportunities, a defensive move that will likely spur further consolidation. The annual savings of $575MM will cover the modest 2.6% premium paid by DVN in less than two months. OXY paid a 62% premium 18 months ago.

The new Devon’s dividend policy has been well received – by paying out half the excess Free Cash Flow (FCF) over the current dividend, it allows investors to model different oil price scenarios and their impact on the payout. It’s another acknowledgment that bringing energy back in favor requires greater financial discipline.

A Biden administration has vowed to cease issuing new permits for fracking on Federal land, a policy that would constrain DVN’s Permian output. States benefit from the associated economic activity – the labor involved in drilling, fracking, transportation of water and other inputs to and from the site all create local jobs. In addition, New Mexico for example, where DVN has much of its Permian acreage, receives a 20% royalty. The Biden campaign’s promise to curtail fracking plays well with the base but is unlikely to be popular closer to the regions affected.

Switching gears, society is adjusting to life with COVID, where data continues to show positive trends. New Jersey, population 9 million with the worst fatality rate of any U.S. state, has 421 COVID patients in hospital, down 95% from the peak in April. We spend hours poring over the data, reading and learning about it. As chronicled before, your blogger doesn’t want to get sick and follows mask/hygiene protocols. But we think the market’s rapid recovery reflects the data – vulnerability increases sharply with age and certain risk factors. For the vast majority it’s not fatal.

Anecdotes also inform – here are some of ours:

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Disclosure: We are invested in all the components of the American Energy Independence Index via the ETF that seeks to track ...

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