Devon Energy (DVN -0.89%) paid a gusher of dividends in 2022. Fueled by its innovative fixed-plus-variable dividend framework, the oil company paid investors $5.17 per share in 2022. With the stock recently trading at around $60 per share, Devon's dividend yield is 8.5%. That's several times above the S&P 500's 1.7%.
However, Devon's dividend payments rise and fall with oil prices. With crude prices cooling off in recent months, the company's most recent dividend was below its peak. Here's a look at what dividend investors should expect from the oil company in 2023.
Drilling down into Devon Energy's dividend
Devon Energy's dividend policy means it makes a fixed base payment each quarter that it can sustain at lower oil prices. The company increased that floor by about 13% following its RimRock Oil & Gas acquisition in the middle of 2022. In addition, the company pays a variable dividend of up to 50% of its excess free cash flow each quarter after accounting for the base dividend.
With oil and gas prices rising in 2022, Devon's cash flow surged, enabling it to pay significant variable dividends each quarter:
Data source: Devon Energy. Chart by author.
However, the variable payment declined last quarter due to lower oil prices. Devon realized an average of $95.80 per barrel sold during the second quarter, enabling it to produce $2.1 billion of free cash flow -- the highest in its history -- and to pay a record variable dividend in the third quarter. However, with oil prices cooling off in that subsequent period (Devon realized an average of $84.38 per barrel), Devon's free cash flow declined to $1.5 billion. As a result, it paid a lower variable dividend in the fourth quarter.
What's ahead for Devon's dividend?
Oil prices continued to decline during the fourth quarter and were recently below $80 per barrel. That will put downward pressure on the company's cash flow in that period, which will likely affect its next dividend payment.
However, on a more positive note, the company should benefit from the acquisitions of RimRock and Validus Energy, which both closed in the third quarter. Those assets should generate significant free cash flow for the company. Devon had projected that those deals would boost its cash flow by 25% compared to the fourth quarter of 2021, assuming oil averaged $90 a barrel. While that price point didn't happen, the acquisitions should help offset some of the impact of lower oil prices in the period. That's why Devon boosted its base dividend following the RimRock deal and expected the Validus transaction would increase its variable dividend outlook by 10%.
Even though oil prices declined during the second half of 2022, most analysts expect a reversal in 2023. Several Wall Street banks set oil price targets at more than $90 a barrel in 2023.
Analysts pointed out several catalysts that should fuel higher oil prices over the next year. On the supply side, they noted that the U.S. government wouldn't be releasing supplies from the Strategic Petroleum Reserve. Meanwhile, oil companies continue to hold back investment spending due to continued uncertainty. On top of that, there are still a lot of unknowns about Russian crude due to the continued fallout from its invasion of Ukraine.
While there are demand concerns because the global economy may slow in 2023, there are also consumption catalysts. China has shifted its pandemic policy, which could drive a significant uptick in oil demand from that country. In addition, there's a growing return to normalcy in other countries, including more people returning to the office in the U.S. and increased business travel. Add in lower prices at the pump, and gasoline demand could remain resilient even if there is a recession this year.
Another gusher of dividends seems likely
That combination of acquisition-fueled growth and the prospect of higher oil prices in 2023 bodes well for Devon's dividend. While the company might not exceed 2022's payout of more than $5 per share, it could come close, especially if oil prices reach the $90-to-$100 range by midyear, as most analysts anticipate. Because of that, Devon remains an attractive option for investors seeking a high-octane divided fueled by oil prices.
