Devon Energy (DVN 0.84%) recently reported its fourth-quarter results and declared its latest dividend payment. Overall, the oil company posted solid results. Oil output hit a record high while operating cash flow was up 18% year over year.
However, for the second quarter in a row, the oil producer's total dividend outlay is lower than the prior payment. Here's a closer look at why that's the case and what it means for investors.
Drilling down into Devon Energy's fourth-quarter results
Devon Energy produced $1.9 billion of operating cash flow in the fourth quarter, up 18% year over year. It was enough money to fund its capital program with about $1.1 billion to spare. That pushed its full-year totals to $8.5 billion of operating cash flow and $6 billion of free cash flow.
Devon used that cash to pay its base dividend (which it's increasing by another 11%), pay a variable dividend, repurchase shares, and strengthen its balance sheet. Overall, Devon Energy is paying out $0.89 per share in dividends based on its fourth-quarter free cash flow. That's lower than its last two dividends:
Data source: Devon Energy. Chart by the author.
As that chart shows, Devon's upcoming dividend will be its lowest over the past year. On a more positive note, the company's total dividend payment in 2022 of $5.17 per share was a record high and more than double what it paid in 2021.
In addition to paying that monster dividend, Devon has also repurchased $1.3 billion of stock since launching that program. Even with all those cash returns, the company ended the year with a $1.5 billion cash balance compared to $6.4 billion in debt. It has an ultra-low leverage ratio of 0.5 times.
What's driving the lower dividend payment?
While Devon's cash flow was higher year over year, it declined compared to the last two quarters:
|
Quarter |
Operating Cash Flow |
Free Cash Flow |
|---|---|---|
|
First |
$1.8 billion |
$1.3 billion |
|
Second |
$2.7 billion |
$2.1 billion |
|
Third |
$2.1 billion |
$1.4 billion |
|
Fourth |
$1.9 billion |
$1.1 billion |
Data source: Devon Energy.
Weighing on its cash flow was lower realized prices for Devon's oil and gas production (which includes gains and losses on hedging contracts). During the fourth quarter, Devon realized an average of $50.62 per barrel of oil equivalent (BOE). That was its lowest price point of the year as it realized $58.48 per BOE in the third quarter, $64.70 per BOE in the second, and $54.75 per BOE in the first.
That declining cash flow directly impacts Devon's dividend payment due to its payout policy. Devon pays a fixed base dividend that it can sustain at lower oil prices. In addition, it pays a variable dividend of up to 50% of its quarterly free cash flow. With free cash flow falling because of lower realized prices, Devon's variable dividend is falling. That policy gives investors a firm income floor from the base dividend, with the potential for a high ceiling because of the variable component.
Devon has been steadily raising that floor as it grows production and reduces costs. However, the variable payout will continue to rise and fall with its cash flow. With oil and gas prices falling in recent months, it's no surprise to see that part of the payout head lower.
Devon Energy's dividend is performing as expected
Devon Energy's variable dividend policy allows investors to capitalize on higher oil prices. However, that upside also has drawbacks since the payout will fall alongside oil prices. While that variability isn't for everyone, Devon offers investors a way to earn an attractive oil-fueled income stream with upside should oil could rise again in the future.
