Even as the world looks to transition away from oil, reliance on this traditional energy source hasn't gone away. And companies like Devon Energy (DVN 0.63%) are still hard at work looking for more. The Oklahoma-based business focuses on oil and natural gas exploration in the U.S.
The past 12 months haven't been good for Devon Energy's stock, however, which is down over 22%, compared to the S&P 500 energy sector's 15% gains during that span. Much of that can be attributed to falling oil prices that have hurt Devon Energy's free cash flow and investor payouts.
Recent reversals from 2022 may cause investors to wonder if the company is still a buy, and I believe the answer is yes. Let's dig in to see why.
NYSE: DVN
Key Data Points
OPEC+ oil output cuts should help
OPEC+ consists of the Organization of the Petroleum Exporting Countries and its allies. Together, they produce around 40% of the world's crude oil, so their decisions and policies directly impact oil prices around the globe.
OPEC+ has been reducing its oil output to increase oil prices in the past couple of years. In 2022, OPEC+ decided to cut 2 million barrels per day (BPD), and in April 2023, it agreed to cut 1.66 million BPD. The organization recently announced it would continue its 1 million BPD cuts enacted in July through the end of the year.
Assuming the OPEC+ plan to reduce oil output goes as planned, and oil prices rise, Devon Energy should directly benefit. It's not necessarily good news for U.S. consumers, but I'm sure Devon Energy and its shareholders will appreciate what it can do for the company's earnings and dividends.
Devon Energy's free cash flow has usually followed the trends of the two global oil benchmarks, Brent Crude and West Texas Intermediate (WTI). This correlation suggests that rises in these benchmarks, sparked by OPEC+'s production cuts, could have a positive impact on Devon Energy's financials.
Brent Crude Oil Spot Price data by YCharts
A dividend rebound should be on the way
One thing's for sure about Devon Energy: It prioritizes its shareholders. Whether dividends or stock buybacks, Devon Energy has committed to returning most of its free cash flow to shareholders, reaffirming its financial stability.
Devon Energy's dividend structure isn't typical. The company has a base dividend amount and then a variable amount based on its excess free cash flow. Here's how its quarterly dividend has shaped up over the past two years:
| Quarter | Declared Date | Dividend Amount |
|---|---|---|
| Q3 2023 | Aug. 1, 2023 | $0.49 |
| Q2 2023 | May 8, 2023 | $0.72 |
| Q1 2023 | Feb. 14, 2023 | $0.89 |
| Q4 2022 | Nov. 1, 2022 | $1.35 |
| Q3 2022 | Aug. 1, 2022 | $1.55 |
| Q2 2022 | May 2, 2022 | $1.27 |
| Q1 2022 | Feb. 15, 2022 | $1.00 |
Data source: Devon Energy.
High oil prices did wonders for Devon Energy's financials in 2022, so this year's dividend amounts are noticeably lower. Still, the company's payout is routinely above the S&P 500 average. With oil prices expected to rise to finish the year, Devon Energy's dividend will likely increase.
Reliable despite the ups and downs
I look for a few characteristics when deciding if an oil stock is a good investment: financial stability, shareholder-friendliness, and efficient operations. Devon Energy checks all three boxes.
The company has low debt compared to its earnings, has committed to rewarding investors through dividends and aggressive stock buybacks, and efficiency is something that management emphasized repeatedly during its latest earnings call. For instance, its drilling efficiencies (drilled feet per day) has improved 24% since 2020.
Investing in this stock requires stomaching its volatile dividend and the cyclical nature of the oil and gas business, but the long-term opportunity should be there. Shareholder value seems to be the company's priority.
