Devon Energy's (DVN 0.19%) dividend continued its downward trajectory in the second quarter. The oil producer recently declared a $0.49 per-share fixed-plus-variable dividend. That's 32% below the prior quarter's level and a whopping 68% below its peak in the year-ago period. The culprit is lower oil prices, which have weighed on Devon's free cash flow.
However, crude prices have quietly rallied in the third quarter. They've recently rebounded past $80 a barrel (and could have further to run). Because of that, Devon's oil-fueled dividend could bounce back quickly.
The cascade lower continues
Devon Energy recently reported its second-quarter results. The oil company delivered a strong operational quarter. The highlight was an 8% year-over-year increase in its oil production, which averaged a record 323,000 barrels per day (BPD).
However, while the company's oil output increased, crude pricing continued to fall. Devon Energy realized an average of $71.74 per barrel of oil sold during the second quarter. That's down from $74.22 in the first quarter and $95.80 in the year-ago period.
Falling oil prices cut into Devon Energy's cash flow. The company produced $1.4 billion in operating cash flow in the second quarter, compared to $2.7 billion in the year-ago period. Add in higher capital expenses ($1.1 billion in this year's second quarter, compared to $573 million in the year-ago period), and free cash flow cratered from $2.1 billion last year to $326 million.
Devon's slumping free cash flow has a direct impact on dividend payments. The company's fixed-plus-variable dividend policy sees it pay a fixed base quarterly dividend (currently $0.20 per share) and up to 50% of its post-base dividend-free cash as a variable dividend.
It's paying a $0.29 per-share variable dividend based on its second-quarter's free cash. That continued the downward trend in the payout over the past year:
Data source: Devon Energy. Chart by the author.
The fuel to rebound
While Devon's oil-fueled dividend has steadily headed lower over the past year, it could start rebounding following the current quarter. Crude oil prices have spiked $10 per barrel over the past month, putting them back over $80 a barrel.
Many analysts believe oil prices could continue rising. For example, Bank of America recently reaffirmed its $90 price target for the global oil price benchmark (Brent) for early next year.
The bank wrote in a note to clients, "The stars are finally aligning for a run in crude oil prices over the coming quarters." It expects the balance between supply and demand to tighten significantly over the next 1 1/2 years, driven by strong demand and efforts by OPEC to reduce supplies.
Higher prices will give Devon Energy's cash flow a boost. Meanwhile, it's putting itself in an even better position to capitalize on higher oil prices by growing production.
Devon expects to complete another 90 wells during the third quarter, which should help boost production. It sees output rising to an average of 322,000-330,000 BPD in the current quarter. In addition, capital spending is moderating slightly, with the company anticipating investing about $900 million in the period.
The combination of rising prices, higher production, and lower capital spending should enable Devon Energy to produce more free cash flow in the coming quarters. That would give it more fuel to pay dividends.
Devon's oil-fueled dividend appears poised to make a comeback
Falling oil prices have weighed on Devon Energy's cash flow over the past year, causing its variable dividend to fall. However, crude prices started rebounding in the third quarter, which could continue. On top of that, Devon's oil output is rising, while its capital expenses are moderating.
These factors could enable it to produce more free cash flow in the coming quarters, giving it the fuel to pay a bigger dividend. Because of that, now could be a great time to buy Devon Energy's stock for the dividend and its upside potential.
