Devon Energy (DVN 0.98%) paid out a gusher of dividends in 2022. Fueled by higher oil prices and its innovative dividend strategy, Devon paid over $5 per share in dividends last year, more than double its total in 2021. That gave it a more than 8% yield on the recent share price, several times above the S&P 500's 1.7% dividend yield.

However, the oil company's last dividend payment was down from its peak level because of lower oil prices. Now, it's facing another headwind as severe winter weather affected its production in the fourth quarter. That issue is likely to weigh on the company's next dividend payment.

Drilling down into the problem

Devon Energy recently disclosed that severe winter weather across its operations would cause its fourth-quarter production to be below its forecast. The company expects its fourth-quarter output to be 15,000 barrels of oil equivalent per day (BOE/d), or 2% below the midpoint of its guidance range. As a result, the company anticipates its production to average 636,000 BOE/d, which includes 316,000 barrels of oil per day. That's below the company's 640,000-660,000 BOE/d guidance range. 

The company noted that the primary culprit was severe weather conditions in the Williston Basin during December. That forced Devon to shut in wells, caused facility downtime, and delayed its well completion activity. On a more positive note, the company has already restored all the affected production and doesn't expect this headwind to persist past the fourth quarter.

However, with production coming in below the company's guidance, it will affect its cash flow in the period. Devon had initially expected a strong quarter. It anticipated its output would be up 6% year over year at the midpoint, fueled partly by its recent RimRock and Validus acquisitions. Meanwhile, it expected production would be 9% higher on a per-share basis thanks to the impact of its share repurchase program. Those cash-gushing acquisitions had the company forecasting that its free cash flow would grow by more than 25% over the prior-year period, assuming oil averaged $90 a barrel in the period.

Unfortunately, oil prices were well below that level for most of the quarter, ending the year at around $80. With its output also falling short of its forecast, Devon's free cash flow will grow less than hoped. That means the company's next dividend payment could decline again.

Is this a worrisome sign or a temporary headwind?

Devon doesn't expect its weather-related issues to persist. However, there are a few more months of winter, so it's possible to see more severe weather. The company increased its exposure to the Williston Basin by acquiring RimRock -- which will grow its oil production from that region by 30% -- putting it even more at risk of a weather-related disruption.

Meanwhile, oil prices continued to fall in early 2023. West Texas Intermediate, the primary U.S. oil price benchmark, has been in the low to mid-$70s over the past few days. If that pricing persists, or crude heads lower, Devon's won't be able to repeat last year's dividend gusher.

However, most oil market watchers believe oil prices will rebound in 2023. Supplies are likely to remain constrained because OPEC is keeping a lid on its output. Similarly, U.S. producers like Devon are focused more on generating free cash flow and returning it to shareholders than reinvesting it to drill more wells and grow their production. Meanwhile, the U.S. government isn't planning on releasing any more supply from the Strategic Petroleum Reserve this year and might seek to replenish that stockpile instead. Finally, there are a lot of questions surrounding Russian supply, given the increasing sanctions on that country following its invasion of Ukraine.

On the demand side, there's a lot of uncertainty because of the current macroeconomic environment. However, there are potential catalysts. The biggest is that Asian countries appear likely to fully reopen their economies this year after years of pandemic-related lockdowns. Meanwhile, if there isn't an economic downturn, consumption elsewhere could strengthen.

Given this backdrop, oil prices could spike in the coming months. That's what many oil company executives believe, anyway. For example, Scott Sheffield, CEO of rival Pioneer Natural Resources (PXD -0.13%), sees oil prices of at least $90 a barrel this year, with an upside of as much as $150 a barrel if demand remains resilient and supplies become an issue. Pioneer's CEO is one of many in the industry who believe we could see a return of triple-digit oil prices at some point this year. That would enable Devon to produce more free cash flow that it could pay out through its variable dividend framework. 

Expect another downer and then a potential recovery

The downward trend in Devon's dividend appears poised to continue for at least the next payment, given the slide in oil prices and its weather-related issues last quarter. However, several upside catalysts could send crude prices higher this year. That would give Devon the fuel to pay a higher dividend. It remains an enticing stock for investors seeking a potentially high-octane dividend.