Devon Valuation Assumptions

Valuation assumptions

During our valuation we had to make a series of assumptions. To value Devon we used both qualitative and numerical data to come up with a range of target prices using a variety of valuation techniques. The techniques we used are Free Cash Flow To Firm (FCFF), Free Cash Flow to Equity (FCFE), Dividend Discount Model (DDM), and Relative Valuation. In the following section we will discuss all assumptions made during the valuations, and provide justification for each of these assumptions. Our ultimate goal is to provide a singular price target and buy recommendation for Devon.

The valuations required assumptions about the economy, and the commodities that Devon derives its profits from. We also had multiple assumptions that spread across all valuation models. One of our primary assumptions is that in the long run the US economy will grow at a rate less than it has historically. We assume that the economy will grow around 4.0% a year in perpetuity. This is an important assumption because we based growth in our models at 4.0% a year in perpetuity, meaning we expect Devon’s long term growth to be equal to GPD growth in The United States. We believe this 4.0% growth represents sustainable growth and correlates well to factors such as population growth and demographics, business environment, the current size of the economy, and the availability of resources.

Energy prices are what drive Devon’s profitability. Over the last three years energy markets have been extremely volatile. West Texas Intermediate spot prices sky rocketed to all time highs in the middle of 2008 only to crash 76% in six months. From its high in 2008 natural gas prices fell 74% per Mcf by the third quarter 2009. After reaching their lows in 2009 oil prices have rebounded significantly while natural gas has remained weak. These severe downward shocks energy prices have caused Devon to make significant unrealized write offs to value of their operating properties. These write...