Activist Toms Capital urges Devon Energy to consider a sale; its claimed discount is worth about $13 a share

Activist hedge fund Toms Capital Management has sent Devon Energy a letter urging the oil and gas producer to review strategic alternatives, including selling the whole company, CNBC reported Wednesday, citing the letter. Toms, which manages just over $4 billion, says it is now one of Devon's top five shareholders, after sitting outside the top ten at the end of June. Devon shares were at $48.31 shortly before 10 a.m. Eastern, up 2.9% from Tuesday's close of $46.93, according to Nasdaq data.

Devon had not returned CNBC's call for comment, and Toms declined to comment beyond the letter. The letter itself has not been made public, so the details below come from CNBC's account of it.

The argument

Devon closed its merger with Coterra Energy in May, adding to its position in the Delaware Basin of West Texas and southeast New Mexico and bringing in assets in the Marcellus, Eagle Ford and Powder River basins, among others. Toms argues that the combined map is too complicated, and that the complexity is why Devon trades at a discount to peers of at least one multiple point, at a time when the stock trades at roughly 4.5 times estimated 2027 EBITDA, according to CNBC.

Its proposed fix is a buyer for the whole company, which could then sell off the pieces it does not want. That would move the risk of asset sales from Devon's shareholders to the acquirer. Another investor, energy-focused Kimmeridge, has already pushed publicly for Devon to slim down its portfolio and set out a post-merger strategy, CNBC reported.

What "one multiple point" means in dollars

A turn of EBITDA sounds abstract. Devon's own filings let us put a rough number on it.

• Equity value: Devon reported 1.1 billion shares outstanding as of July 22. At Wednesday morning's price, that is about $53.1 billion, which matches Nasdaq's market value figure.
• Net debt: Devon's second-quarter 10-Q showed $11.39 billion of long-term debt, including the current portion, and $950 million of cash at June 30, or about $10.4 billion net.
• Enterprise value: roughly $63.5 billion combined.
• Implied 2027 EBITDA: if the company trades at about 4.5 times, the estimate works out to roughly $14 billion.

So one extra turn of multiple would add about $14 billion of value. Spread across 1.1 billion shares, that is about $13 a share, or roughly 27% on top of Wednesday's price. That is the size of the gap Toms says the market is leaving on the table. It is a back-of-the-envelope figure: it uses June balance sheet numbers, ignores items such as leases and other liabilities, and relies on an EBITDA estimate we derived from the multiple CNBC reported, not one Devon has issued.

For context, Devon's shares are up 30% this year, CNBC said, and Nasdaq data shows a 52-week range of $31.47 to $52.71. The company reported $7.42 billion of revenue and $1.91 billion of net income for the second quarter, which included Coterra from May.

Why a sale is not straightforward

CNBC noted that while major oil companies might want Devon's core Delaware Basin acreage, agreeing on a price is hard when oil is swinging. West Texas crude was trading near $95.60 a barrel Wednesday morning, up about 2.3% on the day, on our crude oil chart, after a stretch of sharp moves tied to the Iran conflict and the proposed diesel export ban we covered here. A buyer and seller who disagree about next year's oil price will disagree about what the company is worth.

Toms has run campaigns at Kenvue, Kellanova and Denbury, according to CNBC, and it is working with litigator Alex Spiro. Watch for Devon's formal response, any public release of the letter, and whether Kimmeridge lines up behind a sale or keeps pushing for a slimmer independent company.

Sources: CNBC; Devon Energy SEC filings; Nasdaq. Valuation figures are Chronicle estimates based on public data and are approximate. This is market information, not investment advice.