Oil prices will likely stay higher for longer. An options trade on this energy stock set to benefit
The failure of negotiations between the United States and Iran over the weekend suggests that the disruption to global oil markets will not be resolved quickly, supporting a “higher for longer” oil price base case and the favorable position for North American producers. The trade: Buy the DVN September 2026 $40/50/$60 call spread risk reversal for approximately $1.00 debit. This defined-risk structure targets a move to ~$60 by fall, capturing the post-merger re-rating thesis (Coterra acquisition announced Feb. 2). Max profit of roughly $9 per spread at expiration if Devon trades to, or through, the $60 price target by September expiration. The standstill risk is just over 2% of the current stock price, and in the worst case, one might be compelled to purchase Devon at $40 (plus the $1 premium paid for the spread), or at a ~14% discount to Friday’s closing price. Devon Energy is an independent U.S. oil and gas producer with operations spanning the Delaware Basin in southeast New Mexico and west Texas, the Eagle Ford, the Anadarko Basin in western Oklahoma, the Williston Basin and the Powder River Basin. The company has long been viewed as one of the better-run names in the shale patch, known for its disciplined capital allocation. At the end of 2025, Devon reported net proved reserves of 2.4 billion barrels of oil equivalent, up from 2.2 billion in 2024. With an enterprise value of ~ $37 billion, DVN sits in large-cap territory but has historically traded at a discount to peers. The bull thesis is fundamentally a merger re-rating story layered atop a commodity tailwind. Devon and Coterra announced an all-stock merger expected to close in Q2 2026, creating a leading large-cap shale operator anchored in the economic core of the Delaware Basin, with $1 billion in targeted annual pre-tax synergies by year-end 2027 from capital optimization, improved operating margin and “corporate redundancies.” This is in addition to Devon’s own separate $1 billion efficiency program, targeted for completion by year-end 2026, which means the combined company could see a genuine step-change in cost structure if management executes. According to their most recent earnings presentation, Devon’s wells are 24% more productive than the peer group average, and its per-barrel efficiency is 13% better than the peer group’s average. The combined company is targeting roughly $5 billion in pro forma 2026 free cash flow. If achieved, this number would make the current valuation look outright cheap, implying an FY2026 free cash flow yield of ~13.5%. The company is also returning significant capital to shareholders. The company’s trailing dividend yield of 2% will be higher, given expectations of increased future dividends. Furthermore, the company has approximately $3.36 billion remaining under its $5 billion buyback program, representing about 11% of the float at a current market capitalization of approximately $30 billion. If the situation in the Middle East stabilizes, the Strait of Hormuz reopens, oil prices stabilize in the mid-$80s (WTI), the Coterra merger closes on schedule in Q2, and integration proceeds without major hiccups. Devon delivers on the lower end of synergy targets by year-end 2027. The stock grinds toward the analyst consensus price target of around $56.30. The bear case has two primary drivers: oil price and deal execution risk. A prolonged period of depressed oil prices could hinder Devon’s ability to accelerate operations in the Delaware Basin and produce disappointing results. Devon is heavily leveraged to crude —any meaningful demand destruction or OPEC+ supply surprise could reset the commodity deck entirely. Merger integration risk is real too: cost synergies (there’s that word again) are frequently delayed or overstated, and combining two large shale operators with different cultures, systems and acreage packages is not trivial. Given the massive oil supply disruption that has occurred since Feb. 28, however, there’s little chance the global oil markets will return to an oversupplied condition anytime soon. Honestly, a new bear market in crude is far-fetched given the geopolitical backdrop, and Devon is a North American play. They sell a global commodity without the regional footprint risk associated with operators in the Gulf. The failure of the ceasefire talks in Pakistan over the weekend reinforces the higher-for-longer thesis. Therefore, the setup is favorable. DVN has already run ~35% year to date on energy price strength, but the merger re-rating hasn’t been fully priced in yet. Implied volatility is elevated enough to justify a spread rather than an outright long call, capping the premium at risk while still offering meaningful upside exposure to $60. The September expiry threads the needle: long enough to capture the deal close and first integration updates, short enough to avoid paying for excessive time value. With defined risk and a catalyst-rich path, the DVN bull spread is one of the cleaner risk/reward setups in the energy space right now. 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. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . 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