3 Risks to Watch at Devon Energy Corporation (DVN)

I recently covered five reasons to love Devon Energy Corporation (NYSE:DVN) . As much as there is to love about this company, all investments have risks that need to be monitored. Here are three areas that Devon investors might want to watch.

It’s still a bit gassy
While Devon does have a fairly well balanced production mix, that production does tilt toward natural gas. In fact the company produces more than 2 billion cubic feet of natural gas each day, which is more than 3% of all the gas consumed in North America. That’s enough to rank the company fourth behind Exxon Mobil Corporation (NYSE:XOM), Chesapeake Energy Corporation (NYSE:CHK), and Anadarko Petroleum Corporation (NYSE:APC) . In total, about 60% of the company’s production is natural gas.

Both ExxonMobil and Anadarko produce more liquids and respectively rank second and sixth domestically in terms of average daily liquids volume. In addition to that, both companies have operations that span the globe and operate both onshore and offshore. That diversification has helped both produce much more stable returns. Devon’s operations, like Chesapeake’s, are 100% onshore, though Devon has international presence thanks to its Canadian operations and a much stronger balance sheet.

To be fair, Devon’s oil production was up 20% last year and its not investing any capital to grow its natural gas business. Instead, its allowing its gas production to decline and filling in that production with oil and natural gas liquids. However, some of that production is in another commodity selling at a discount.

The current commodity conundrum
You see, Devon also produces Canadian crude out of the oil sands. The problem is that the commodity, thanks to pipeline and refining constraints is cheap. That crimps its profits just like North American natural gas.

Now, there is hope on the horizon as new pipelines are coming online and rail is beginning to pick up the slack. However, in the near term, Canadian crude is priced at a big discount to U.S. benchmark West Texas Intermediate crude oil. Having not one but two unloved commodities has hurt Devon’s stock price and made it dirt cheap.