An energy name in Josh Brown's Best Stocks list just completed a big merger, adding to its bull case
(This is The Best Stocks in the Market , brought to you by Josh Brown and Sean Russo of Ritholtz Wealth Management.) Josh — We’re going to take a break from the AI capex buildout theme today and take a look at another area of the market that’s not so hot. A major energy merger has closed, and the combination of Devon Energy and Coterra Energy has created a gigantic player with one of the lowest costs of production in the patch. Today Devon Energy and Coterra Energy officially became one company. We’re looking at the stock in a drawdown, not as it’s making a new high. The stock fell Wednesday from a confluence of having reported a so-so earnings quarter along with the typical merger arbitrage related pressure that comes along with closing of a deal. That pressure should abate and the stock may find support here. We’re writing about it at what may end up being a very attractive entry for people who do not currently have energy exposure. Now that the companies have combined, it’s important for new investors to understand why they did the deal in the first place. Both operators already owned premier acreage in the Delaware Basin. That’s the western sub-basin of the Permian in West Texas and southeastern New Mexico, and it has emerged as the most productive and economical place to drill for oil in the country. Rather than compete for the same inventory separately, they decided to dominate it together. The combined company enters the world as the leading Delaware operator, with over 10 years of high-quality drilling locations, 1.6 million barrels of oil equivalent per day in production, and a $58 billion enterprise value that puts it in a different conversation than either company could claim on its own. The market will be watching whether management delivers on two simultaneous $1 billion efficiency programs: Devon’s standalone optimization plan that’s nearly complete, and the $1 billion in merger synergies targeted by year-end 2027. If they hit both, the free cash flow math gets genuinely compelling. As Sean will detail below, the combined company enters the world with a 31% dividend increase to $1.26 annualized, a new $5 billion-plus buyback authorization, and a sub-50% reinvestment rate on a clean balance sheet. The strategic logic is straightforward. Execution is where stocks get made or broken. Raymond James upgraded the outlook for Devon and raised its price target to $72 from $62 this week. The analyst believes the projected synergies will be higher than the $1 billion guide and that, inclusive of dividend and buyback, this stock could offer a 40% total return to shareholders as non-core assets are sold and AI-driven drilling efficiencies are realized. We talked about Devon during an earlier column, and the trade worked out that time. Now we revisit the story as the combined company takes its place among the larger energy names in the S & P 500. Best Stock Spotlight: Devon Energy Corp. (DVN) Sean — We wrote about Devon Energy and the potential merger in February. Here’s Josh on the setup from February: “When the 50-day crossed above the 200-day in late summer, that was a clue that something may have been changing here. In November, she reclaimed her 200-day (sorry, I knew a girl named Devon once. Nothing happened.) and managed to hold it on pullbacks. Mid-60′s RSI makes this a less extended chart than Targa, I like this one right here and now.” Shoutout to Devon, because this call ended up being a good one. The stock is up 17% since then, and that includes an 8% decline from yesterday due in part to the merger, earnings and a -6% swing in oil prices because of Iran de-escalations. We spoke about the merger in February, and the narrative still plays. This merger creates a dominant player in the Delaware basin with massive scale. The larger the oil company, the lower the cost of capital, the better infrastructure access and the more leverage over service companies. Enhanced shareholder return is expected, with the dividend set to increase 31% per share starting in Q2, and share buybacks are set to resume (after a pause during the merger). Post-merger, the combined company expects a new buyback authorization of $5 billion, which is roughly 7% of the current float. Coterra has massive buyback credibility too, with 75% of free cash returned to shareholders in 2025. The combined entity will trade at roughly 10x earnings, making this stock cheap relative to the market and its own industry. This valuation also makes buybacks more accretive. If you thought we’d go one article without mentioning AI, you’d be wrong. Devon launched a “smart gas lift” program, which uses AI-driven models and sensors to optimize gas extraction without human intervention. This program was piloted in 2025 and observed a 2%-3% production increase. The company is targeting this technology to be applied to 1500 wells across its portfolio. Now that we got our AI mention in, here’s Josh on the technicals. Risk management Josh — I’m showing you the ultra long-term above to give you some perspective on what a long road it’s been for this name since the heyday of the shale boom in the first two decades of the 21st century. As you can see, this was once a highflier that’s spent many years locked in a brutal downtrend with very little to show for all that volatility. The recent price action represents a potential trend change although it’s still too early to say for sure. But I like the higher low on this monthly chart… Above is the standard one-year technical chart we usually look at, complete with 50- and 200-day moving averages and RSI. That nasty red candle yesterday will test the bulls. There could be some residual weakness related to the merger arb dynamics I outlined at the top of this column but I expect them to subside. Normally, we’re writing about strong stocks getting stronger but this is a different sort of set-up. DVN made a run at $50 twice and couldn’t hold it, forming a pretty clear double top before pulling back to where it sits now around $46. That’s the ceiling the stock needs to clear convincingly for this to work as a trade. On the downside, $40 is the line in the sand. That’s where the 200-day moving average is sitting and where the stock found support on the last meaningful selloff. The RSI at 43 gives you some room. The stock isn’t oversold enough to scream “load up” but it’s not stretched either. Risk/reward here is defined. Below $40 and the market is telling you they don’t believe in the fundamental story. A successful assault on the low $50’s and many professional traders would consider adding to their positions on that confirmation. We’ll revisit this one again. DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. 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