Oil and natural gas are commodities, and investors in the energy sector need to come to terms with that. Devon Energy (DVN 0.19%), like other companies that produce these key global fuels, doesn't control the often dramatic ups and downs of these commodities. However, their price swings can have a huge impact on Devon's financial performance.
What Devon does control, however, is its dividend. And if things go according to plan, the recent upswing in oil prices should lead to sizable dividend increases for shareholders.
Volatility is the norm in the energy sector
There are a lot of factors that go into an energy company's results. For example, production is a key metric to track. Increasing production means the business is growing, and falling production suggests the opposite. Operating costs are important as well. Low costs mean an energy producer will make more per barrel, and high costs don't have the same appeal.
Image source: Getty Images.
Still, the most important factor in most situations will be the price of oil and natural gas. If oil prices are falling, producing more low-cost oil won't stop the company's top line from shrinking. Meanwhile, even poorly run energy companies can make huge profits if oil prices are skyrocketing.
Devon Energy, for its part, is a fairly well-run energy company. For example, it achieved an all-time record for oil production in the second quarter and, at the same time, has a very attractive breakeven price of $40 a barrel. There are clear fundamental reasons to like the company, but oil prices remain the key determinant of performance.
Devon is passing its success (and troubles) on to shareholders
Given this backdrop, Devon's board of directors has chosen to implement a variable dividend policy. Basically, when Devon does well, shareholders will receive larger dividends, and when times are tough, the dividend will shrink. It's a fairly straightforward way to reward investors in the highly volatile energy sector, even though Wall Street more typically prefers consistent and slow-growing dividends. The variable model takes into consideration the variable nature of the energy sector. It won't be a good fit for all investors.
In fact, over the past year, as energy prices were in retreat, the variable dividend hasn't been kind to shareholders. It has been cut from $1.55 per share in the third quarter of 2022 to just $0.49 for the third quarter of 2023.
DVN Dividend Per Share (Quarterly) data by YCharts
That tracks, with a quarter or so lag, the trajectory of West Texas Intermediate (WTI) crude, a key U.S. energy benchmark. But oil has bounced back recently, rising from a low of around $73 a barrel in March 2023 to a recent level of roughly $100. The last time oil was at that level, Devon's dividend payment was in the area of $1.25 per share.
Given the run-up in oil prices, it's reasonable to expect Devon's financial performance to improve. And that, in turn, should lead to a higher dividend. Maybe investors shouldn't go in expecting an increase from $0.49 per share to $1.25, which would be a huge swing. But it isn't unreasonable to think that it will get up toward that figure in a couple of quarterly steps, assuming oil prices don't turn lower again -- which is always possible.
No surprises with Devon's dividend
Given that the dividends a company pays are at the discretion of the Board of Directors, there's no way to actually know what will happen with Devon Energy's dividend. However, the company has clearly laid out how it thinks about the dividend. And that means a dividend increase is highly likely given the upturn in oil prices. The dividend increase could be quite material as well, given the dramatic, and swift, energy price advance. That may be nice for shareholders, but remember the grain of salt here: The dividend could get cut just as fast, given the variable dividend policy.
