Last week was a rough one for Devon Energy's (NYSE:DVN) investors. First off, shares of the shale giant tumbled double-digits after the company reported fourth-quarter results that were well below expectations due to production problems entirely out of its control. On top of that, the oil giant didn't join most peers in announcing an increase in cash heading back to investors through a higher dividend or a share-repurchase program.
However, one thing CEO Dave Hager made clear on the accompanying conference call was that the company planned to send more cash to investors in the future. Here's a look at why Devon wants investors to wait a little while longer.
Addressing the elephant in the room
Hager led off his prepared comments on the call stating:
I want to address a topic that we have received a lot of questions on, and that is, why we have not authorized a share-repurchase program. Let me be clear, as we generate more cash through our operations and asset divestiture programs, we will reward our shareholders through higher dividends and opportunistic share buybacks.
The reason Devon gets so many questions about when it will repurchase shares is that a growing number of its peers are already sending more money to investors via buybacks. For example, last fall Anadarko Petroleum (NYSE:APC) announced that it would use $2.5 billion of its cash cushion to repurchase shares. And with oil prices having improved since then, Anadarko recently boosted that program by $500 million and also increased its dividend fivefold, putting that payout almost back to where it was before the oil market downturn. Hess (NYSE:HES) and Pioneer Natural Resources (NYSE:PXD) also announced share-buyback programs in recent months, with Hess authorizing $500 million, while Pioneer Natural Resources gave the green light on a $100 million buyback and a fourfold increase in its dividend. Given this trend, some of Devon's investors are getting impatient to see a similar windfall.
First things first
However, instead of announcing a buyback, Devon Energy's CEO explained how the cash will be used:
Our near‐term priority is to use a significant portion of our large cash balance to reduce the debt associated with our upstream business. Why is this our top near‐term priority? With our world‐class Delaware and STACK positions shifting to full‐field development mode it is absolutely critical that we possess a top‐tier balance sheet in order to maintain consistent activity levels through all cycles. Commodity prices will go up and down, but our plan to execute on a steadier and more measured development program through all cycles will optimize the returns and value associated with our development programs. And while we certainly could have authorized a couple billion dollar share repurchase program today and had our stock price positively respond to this type of announcement, it is not the correct move for Devon right now. Our business is performing at a very high level, and with the continuation of current commodity prices coupled with imminent assets sales during 2018, I am confident in stating that there will be increasing shareholder returns this year.
Before Devon starts sending more money to investors, it wants to be certain that its balance sheet could handle anything the oil market sends its way. That's driving its desire to reduce debt by another $1.5 billion this year.
It's worth noting that the company had $2.7 billion of cash on hand at the end of the year, so it's not strapped for money right now. Furthermore, Pioneer, Hess, and Anadarko are also using a portion of their cash on hand to repay debt as they start to send more money to investors. Pioneer is planning to use some of its $2.2 billion cash pile to repay a $450 million debt that matures in May. Anadarko, for its part, plans to repay $1 billion of maturing debt over the next two years, and Hess expects to pay off $500 million in debt this year. While Devon could have followed the same blueprint and allocated capital to repay debt and buy back stock, there's nothing wrong with being ultraconservative and prioritizing further debt reduction just in case commodity prices take an unexpected turn for the worse.
Impatient investors made this oil stock an even better bargain
Devon's decision to hold on to its cash until it hit its debt-reduction target didn't sit well with impatient investors who sold the stock off after the company's poor fourth-quarter showing. However, as Hager made clear on the call, a buyback is coming soon. That makes shares of the oil giant look like an incredible bargain for patient investors, who could earn market-beating returns as Devon's cash-flow-growth engine revs up in the coming years.