Devon Energy (DVN +0.42%) has become one of the more popular stocks in the oil patch over the past year. A big driver is the company's monster dividend. Thanks to its innovative fixed-plus-variable dividend framework, Devon paid over $5 per share in dividends last year, giving it a roughly 8% annualized yield on the recent stock price.
However, Devon recently ran into weather-related headwinds, which could impact its next dividend payment. Devon's pain could become Pioneer Natural Resources (PXD +0.00%) gain. The rival oil producer offers even more income upside without the exposure to the weather-impacted region that could affect Devon's dividend.
Drilling down into Devon's issue
Severe winter weather reduced Devon Energy's oil and gas production by 15,000 barrels of oil equivalent per day (BOE/d) during the fourth quarter or by about 2%. As a result, production will average roughly 636,000 BOE/d, putting it below its 640,000-660,000 BOE/d guidance range. That forecast level had the company on track to grow its output by 6% year-over-year and 9% on a per-share basis after factoring in its lower share count thanks to its repurchase program.
NYSE: DVN
Key Data Points
The culprit was severe winter weather, primarily impacting its Williston Basin operations. That caused well shut-ins, facility downtimes, and delays in completing wells. The company did restore all the impacted areas by the end of the fourth quarter.
Devon recently bolstered its position in the Williston Basin after it acquired RimRock Oil and Gas for $865 million in cash. That company added 15,000 BOE/d to Devon's total from the region, growing it by 30%. Devon expected the highly accretive transaction would bolster its ability to pay dividends, leading it to increase its fixed base payout by 13% after closing the deal.
Unfortunately, the weather will likely rain on the company's dividend parade. With oil prices also lower in the fourth quarter, Devon will probably pay an even lower variable dividend based on its fourth-quarter free cash flow. That could cause more income-seeking investors to look elsewhere for a high-octane income stream, given that shares sold off sharply after it lowered its last quarterly payment.
Potentially gaining from Devon's pain
Yield-focused investors could turn to rival oil producer Pioneer Natural Resources. That's because it offers greater dividend payout potential and has no exposure to the Williston Basin.
NYSE: PXD
Key Data Points
Pioneer Natural Resources followed Devon's lead in 2021 by launching a fixed-plus-variable dividend strategy. It pays out up to 75% of its excess free cash flow through its variable dividend. For comparison, Devon caps its variable payment at 50% of its quarterly free cash flow.
Pioneer has delivered a sector-leading dividend over the past year. It has paid out more than $26 per share, giving it a dividend yield of more than 10%. Given its higher dividend payout target, Pioneer will likely continue offering investors a higher dividend yield than Devon.
Meanwhile, Pioneer doesn't have any operations in North Dakota's Williston Basin as it focuses solely on Texas' Midland Basin. While that area isn't immune to severe winter weather, North Dakota winters are known to be harsh, so there's a higher risk that Devon could face another weather-related issue this year, given its growing presence in that region.
Another benefit of Pioneer's regional focus is its superior economics. Pioneer boasts best-in-class margins and leading returns on capital employed because of its focus on the resource-rich Midland Basin. That enables the company to generate more cash flow per barrel produced while stretching its capital dollars further. As a result, it can make more free cash flow than Devon on the same production base, giving it more money to pay out via its variable dividend strategy
A potentially more enticing option for a high-octane income stream
Devon Energy is a top-notch oil stock that offers a big-time dividend. However, its recent pain in the Williston Basin might lead more investors to consider the even higher income upside potential of rival Pioneer Natural Resources. Its focus on the Midland and higher payout ratio could enable it to deliver even more dividend income to investors in the coming years.
