What happened

Shares of Devon Energy (DVN -0.46%) rallied 12.4% in August, according to data provided by S&P Global Market Intelligence. Fueling the oil producer's gain was its second-quarter results and news it's buying more cash-gushing oil assets. That continued the oil stock's ferocious rally this year, with shares rocketing more than 50% higher thanks to higher crude prices. 

So what

Devon Energy started August off with a bang. The company reported strong second-quarter results, highlighted by record free cash flow. Devon's operating free cash flow more than doubled year over year to $2.7 billion. It kept capital expenses to 22% of that total, enabling it to produce $2.1 billion in free cash, the highest quarterly total in its 51-year history. 

That gave Devon Energy a gusher of free cash flow to return to shareholders. Driven by its innovative fixed-plus-variable dividend program, the company paid investors $1.55 per share in dividends last quarter. That's 22% above its prior rate, setting a new record for the company. Devon also continued buying back shares. Through the end of July, it has repurchased 23.9 million shares, or 4% of shares outstanding, for $1.2 billion. Even with those cash returns, the company's cash balance rose by $823 million to $3.5 billion against $6.5 billion of debt. 

Devon has been using its cash-rich balance sheet to purchase additional oil properties. It closed its $865 million deal to buy the leasehold interests and related assets of RimRock Oil & Gas in the Williston Basin at the end of July. A few weeks later, it agreed to buy Validus Energy for $1.8 billion, bolstering its position in the Eagle Ford shale. 

The Validus Energy deal will be immediately accretive to Devon's financial metrics, including free cash flow per share. It's paying an attractive value of two times cash flow and a 30% free cash flow yield, which is even cheaper than its RimRock deal. The company expects the acquisition to enhance its ability to pay variable dividends in the future. 

Now what

Devon Energy is absolutely feasting on higher oil prices this year, enabling it to produce an enormous level of free cash flow. With a rock-solid balance sheet, the company is returning the bulk of that windfall to shareholders. It's also strategically using the remainder to make acquisitions that should grow its cash flow in the future. That will give Devon more fuel to continue paying attractive dividends, making it a compelling option for investors seeking to cash in on higher oil prices.