If you missed Nvidia in 2016... (From Behind the Markets)
Article Highlights
- Devon Energy’s all-stock merger with Coterra reflects accelerating consolidation across a maturing U.S. shale industry focused on efficiency over expansion.
- The combined company gains geographic diversification and scale, but investors are watching closely for dividend sustainability and potential EPS dilution.
- Analysts have responded positively, with price targets suggesting upside, though volatility may persist ahead of Devon’s upcoming earnings report.
It was a buy-the-rumor, sell-the-news week for Devon Energy (NYSE: DVN). On Feb. 11, the company announced an all-stock merger with Coterra Energy (NYSE: CTRA) that if approved by shareholders of both companies will create a $58 billion energy giant.
DVN stock was up nearly 4% before the announcement but fell 2.2% on Feb. 12. Price action like that isn’t uncommon; merger announcements attract some investors while pushing others away.
What adds some volatility to this merger announcement is that Devon Energy will report Q4 2025 earnings after the market close on Feb. 17.
At that time, analysts and investors will hope to hear management strike a confident tone about the merger approval. One key area of interest will be the company’s dividend.
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Why Coterra? And Why Now?
Let’s take those questions in reverse order. The timing of the merger has to do with the ongoing consolidation in the oil and gas industry.
The U.S. shale industry has matured, meaning companies are looking for operational efficiency as opposed to drilling more wells—especially with waning demand forecasted for 2026. To that end, the combined company will have scale, diversification, and resilience. That’s particularly important as the price of oil remains under pressure.
The merger of the two upstream oil and gas companies also brings geographic diversity. Coterra primarily operates in the Marcellus Shale basin (northeast Pennsylvania), the Andarko Basin (in Oklahoma) and the Delaware Basin (in southeast New Mexico and Texas). Devon, on the other hand, is concentrated in the Delaware Basin, so this merger expands its reach, making it less impacted by fluctuations in oil prices.
All Eyes Will Be on the Dividend
Oil and gas stocks are among the most cyclical in the energy sector. That’s why large-cap names, including Devon Energy, pay a dividend as a way to increase shareholder value in a sector that can be unforgiving.
DVN stock's dividend currently yields 2.18%, or 24 cents per share quarterly. Meanwhile, Coterra's dividend currently yields 2.86%, or 22 cents per share quarterly. The companies have announced plans for a 31.5 cents per share dividend once the merger closes, which represents an increase of 31% from Devon’s current payout.
It’s also why the merger's all-stock nature is important. This prevents the combined company from piling on debt. That’s critical in an industry that’s acutely impacted by commodity prices. If oil and gas prices drop more—as some analysts believe they will—a company wouldn’t want to be heavily leveraged.
The flip side, however, is that the combined company will mean a larger share count, which can be dilutive to earnings per share (EPS). The company will have to generate sufficient cash to maintain and ideally increase its dividend.
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Investors and Traders May See the Merger Differently
Income-focused, buy-and-hold investors will likely be positive about the deal. The merger will create a larger, more resilient shale producer. And since Devon will be moving its operations to Houston, it will have deeper ties to a major energy hub.
On the other hand, short-term traders or dividend investors who prioritize yield may want to wait for more certainty about the safety and growth of that dividend.
Analysts Are Signaling Approval
On the day of the announcement, Raymond James raised its price target on DVN stock to $52 from $44. Going back to the beginning of the year, several analysts have a price target of $50 or higher.
A move to $50 would be a gain of approximately 10% above the current consensus price, and it would represent a gain of nearly 20% from the closing price on Feb. 12.
Activity will likely be volatile in the week before the company reports earnings. Investors who are on the sidelines but looking to get involved may want to wait for the results before getting involved.
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