Company: Devon Energy Corporation (SYM: DVN) With a yield of 3.25%, Devon Energy is an independent energy company that engages in the exploration, development, and production of oil, natural gas, and natural gas liquids in the United States. It operates in Delaware, Eagle Ford, Anadarko, Williston, and Powder River Basins. It also has a strong 32-year history of paying out dividends. In fact, Devon Energy’s most recent dividend of 22 cents was paid on December 30. Its next one is expected around March 31, as Devon continues to return capital to shareholders. In addition, Devon has been actively buying back stock since 2021, recently increasing its buyback program to $5 billion, which it expects to complete by 2026. Even better, according to President and CEO Rick Muncrief, “Our reliable operating performance led to another quarter of significant free cash flow generation. This enabled us to return value to our shareholders through our ongoing share buyback program and to take the first step in our debt reduction plan by retiring nearly $500 million of debt at maturity,” as noted in its third quarter earnings press release. While the stock has been knocked down recently, falling from about $42 to $34.14, it’s still an attractive opportunity. For one, the latest pullback doesn’t factor in production from its $5 billion acquisition of Grayson Mill, which added 307,000 net acres in Devon’s Williston Basin business, as well as 100,000 barrels per day of high-margin production. Two, that acquisition is expected to add more than $200 million in free cash flow to Devon, which will allow it to generate a free cash flow yield of about 12%, says Seeking Alpha. Three, analysts at Benchmark just upgraded the DVN stock to a buy rating with a price target of $44. The firm argues that operational earnings beats and share buybacks should better reflect in the stock’s valuation. The firm also argues that free cash flow for the year will be about $3.6 billion, which should be enough for Devon to raise its yield. Analysts at Bernstein also upgraded the Devon Energy stock to an outperform rating with a price target of $45. The firm argues that an undersupplied natural gas market provides a unique long-term buying opportunity. |
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Earnings were solid. In its most recent quarter, Devon Energy’s EPS of $1.10 was in-line with estimates. Revenue of $4.02 billion, up 4.7% year over year, beat by $470 million. Operating cash flow of $1.7 billion was an 8% increased quarter over quarter. The company also achieved free cash flow of $786 million, which supports further stock buybacks and debt reduction. The company also retired $472 million in debt, which puts it in a strong financial position. It also achieved 335,000 barrels of oil production per day in the quarter, which was 4% above guidance. In addition, as noted in the company’s earnings release: “Devon’s growth and outperformance in the third quarter was primarily driven by its Delaware Basin asset, which accounted for 67 percent of companywide volumes at 488,000 Boe per day. This production result represents a growth rate of 6 percent quarter-over- quarter, driven by 55 gross operated wells being placed online during the quarter. The outperformance was driven by strong well productivity and base production that continued to exceed expectations.” Moving forward, Devon Energy revised its fourth quarter production forecast higher. It now expects a range of 811,000 to 830,000 barrels of equivalent (Boe) per day thanks to its acquisition of Grayson Mill. |
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Written by Ian Cooper