Global demand has increased by 6 percent since 2008, driven by double-digit consumption growth in every developing region in the world. Global consumption of oil increased by 5.18 million bpd over the past five years, but global oil production only increased by 3.85 million bpd. (BP notes in its Statistical Review of World Energy 2014 that differences between these world consumption figures and world production statistics are accounted for by stock changes and consumption of non-petroleum additives like ethanol.) Further, of the 3.85 million bpd global increase in oil production, the US was responsible for 3.22 million bpd — 83.6 percent of the global total!  

Conclusions

While oil production in the US has outpaced changes in US demand, that’s not the case for the rest of the world. The rapid growth in demand in developing regions — combined with a not-so-rapid increase in oil production — has kept oil prices stubbornly above $100/bbl. Given that US supplies are connected to world markets indirectly through export of finished products as well as crude oil imports, high global oil prices do contribute to higher US oil prices.

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Portfolio Updates

Devon’s Stacked Deck    

The deals just keep coming for Devon Energy (NYSE: DVN) the one-time gas giant that’s quickly transformed itself into a fast-growing domestic crude producer, largely on the dime of the yield-hungry investors in master limited partnerships (MLPs).

The final shuffle in the company’s now completed transformation took place last week with the announced sale of mature, mostly gas producing properties in the Rockies, Gulf Coast and Mid-continent. The MLP Linn Energy (Nasdaq: LINE) has agreed to pay Devon $2.3 billion for lease rights on nearly 900,000 net acres, which is 40 percent more than the land area of Rhode Island.

The 4,500 wells on this land currently produce about 275 million cubic feet of natural gas equivalent, declining at a relatively modest annual rate of 14 percent. That profile fit Linn’s imperative of maintaining a high distribution yield even at the cost of taking on additional debt, but not Devon’s new crude-focused growth strategy.

The sale price valued these declining, non-core assets at 6.6 times their 2013 EBITDA, or not much more than the valuation of their fast-growing, free cash flow generating seller. Devon’s after-tax proceeds of $1.8 billion will land atop the $2.7 billion after-tax it got from the divestiture of its Canadian gas assets at a similar multiple.

Much of this will go into lowering debt elevated by last year’s $6 billion acquisition of a 80,000 net acres in the Eagle Ford. That acquisition, at a much lower EBITDA multiple, will go down in history as a steal if Devon hits its production forecasts.

So, to recap, Devon got an EBITDA multiple of 7 for unwanted and not especially lucrative gas assets that were slowing it down to recoup the bulk of the cash it paid for choice crude acreage expected to spearhead the company’s 30 percent gain in crude production this year and 20 percent in 2015, purchased for an EBITDA multiple of 4. In combination with Devon’s increasingly profitable thermal oil sands production in Canada, Eagle Ford is expected to deliver $1 billion in free cash flow — the cash profits left over after capital spending — this year.

Assuming relatively stable commodity prices, free cash flow could accelerate from there as Eagle Ford, the oil sands and Devon’s promising Permian acreage pay off.

Meanwhile, Devon conjured $6 billion in book and market value out of thin air last year by contributing its midstream assets to a new master limited partnership. The contributed pipes and processing plants accounted for 7 percent of last year’s EBITDA, management recently revealed and were priced on that basis by the market at $1.7 billion at the time as part of Devon. But Devon hung a $4.8 billion price tag on its contribution to the MLP based on the much loftier MLP valuations, and has since seen its stakes in the sponsored MLP and its general partner appreciate to more than $8 billion. MLP investors love even low yields these days when these come coupled with promises of uninterrupted growth.

Management doesn’t sound in a hurry to cash out these gains and pay taxes, and is probably already dreaming up ways to make EnLink Midstream Partners (NYSE: ELNK) and EnLink Midstream (NYSE: ELNC) even bigger via the inevitable dropdowns and, quite likely, acquisitions in which Devon’s EnLink stakes could serve as currency.

No management has done more than Devon’s of late to capitalize on the gulf in valuation between MLPs and energy corporations subject to income tax. And no one is likely to reap a richer windfall than Devon’s coming gusher of sweet crude.

Wells Fargo thought the sale to Linn fetched $1 billion more than expected, while Citigroup upgraded Devon to a Buy this morning, with a new $96 12-month target (up from the prior $75) and a $112 per share asset value estimate based on midstream assets the analyst claims remain underappreciated.

We like Devon both as a fast-growing crude driller and the marketer of MLP yield, which is why it remains the #7 Best Buy below $90.

— Igor Greenwald