The stock market hasn't been too kind to Devon Energy (DVN 8.61%) this year, with the stock down over 12% year to date (YTD) (as of Oct. 18). Some would point to Devon Energy's performance this year as just another example of the energy sector's cyclical nature, but I'd point to the performance of similar companies to show why the market may be unfairly punishing it.
There are three areas where energy companies operate: upstream, midstream, and downstream. Companies operating upstream, such as Devon Energy, deal with the exploration, drilling, and production of oil and natural gas.
Compared to Devon Energy's performance, many of its upstream counterparts are performing well this year. Take Occidental Petroleum and Diamondback Energy, for example, up over 9% and 29% YTD, respectively. Recent pessimism toward Devon Energy presents a good time for investors to go bargain hunting.
NYSE: DVN
Key Data Points
A financial boost could be on its way
Like its competitors, Devon Energy's financials have taken a step back after impressive growth in the first half of 2022. However, the company should see a boost in the coming quarters thanks to an agreement by the Organization of the Petroleum Exporting Countries (OPEC) and a handful of non-OPEC countries.
OPEC is an oil-producing coalition that accounts for around 40% of the world's oil output. Needless to say, they have a lot of influence on global oil prices.
In the first half of 2022, the West Bank Intermediate (WTI) -- one of the global benchmarks for oil prices -- skyrocketed to over $110 per barrel, padding Devon Energy's revenue along the way. From July 2022 to July 2023, the WTI retracted to its January 2022 levels.
In response to the drop in oil prices, OPEC+ agreed to reduce its oil output back in July 2023 in an attempt to increase oil prices, and it seems to be working (as I'm sure you've noticed if you pumped gas recently).
DVN Revenue (Quarterly) data by YCharts
Devon Energy's financials are directly tied to oil prices, so it should see a spike if it follows along the lines of the WTI as usual. Oil prices aside, Devon Energy's operations are running better than ever and trending in the right direction.
Its Q2 2023 oil production grew 8% year over year and set a company record. It's not just about the increased oil production, though; it's about how much more efficient the company's getting while doing it. Its drilling efficiencies (drilled feet per day) and completion efficiencies (completed feet per day) have improved 24% and 16%, respectively, since 2020. That's a recipe for long-term success.
A nice dividend that will become more lucrative
Devon Energy has a unique dividend structure compared to most companies. It has a base amount (currently $0.20 per share quarterly) and a variable amount that's added to it based on the company's cash flow. Devon Energy expects the dividend yield to directly correlate with WTI pricing as follows:
| WTI Price | Estimated Dividend Yield |
|---|---|
| $40 | 1.79% |
| $60 | 2.55% |
| $80 | 5.00% |
| $100 | 7.64% |
| $120 | 9.62% |
Data source: Devon Energy. Yield based on stock price as of Oct. 18, 2023. Chart by author.
According to the U.S. Energy Information Administration, the WTI average was just under $74 per barrel in Q2. Devon Energy paid out roughly $0.49 per share in Q2, so the recent jump in WTI prices should be news to Devon Energy investors' ears.
With WTI prices averaging over $82 per barrel in Q3, I wouldn't be surprised to see the dividend jump a considerable amount. Exactly how much will ultimately depend on Devon Energy's excess free cash flow, but it's reasonable to expect at least a 20% increase based on management's statements in the past.
A good entry point for investors
After its lackluster 2023 so far, Devon Energy has seemingly entered into value territory. Its price-to-earnings ratio is just over 6.7, noticeably lower than many of its competitors.
DVN PE Ratio data by YCharts
Considering its dividend is a major selling point for investors, I wouldn't be surprised to see investors flock back to the stock once higher oil prices translate to more free cash flow and a higher dividend yield.
Couple that with the roughly $900 million remaining of the company's $3 billion stock buyback program, and there's a chance for significant shareholder value appreciation as earnings per share increase.
The outlook for Devon Energy looks promising, so current prices could be a good entry point for investors looking to begin a stake.
