Devon Energy (DVN +0.93%) offers income investors something rather unique. The oil company pays a base quarterly dividend that it can sustain at lower oil prices. On top of that, it pays a variable dividend that fluctuates with its oil-fueled cash flow.
The company recently ratcheted up that secondary payment. That additional payout could head even higher in 2024. This upside potential makes Devon Energy an interesting option for income-seeking investors.
NYSE: DVN
Key Data Points
Bouncing back
Devon Energy's dividend payment has fluctuated with oil prices over the past several quarters. It surged with crude oil in early 2022 before sliding as oil cooled off over the last few quarters.
However, that steady downward trend has finally reversed course:
Data source: Devon Energy. Chart by the author.
Devon Energy recently declared its latest dividend payment, setting it at $0.77 per share (a $0.20 per share base payout and a $0.57 per share variable payment). That's a whopping 57% increase from its dividend payment last quarter. This payment pushed its 2023 total to $2.87 per share. That gives Devon Energy an annualized dividend yield of 6.2% at its recent share price.
The oil company's resurgent free cash flow fueled the higher dividend. Devon's operating cash flow jumped 23% from last quarter to $1.7 billion, while its free cash flow more than doubled to $843 million. Its cash flow got a boost from higher production (output rose by 10% per share compared to last year) and improved oil prices (Devon sold its oil for a net $79.81 a barrel in the third quarter compared to $71.74 a barrel in the second quarter).
The dividend could head even higher next year
Devon Energy aims to generate even more cash next year. The company recently gave a sneak peek at what's ahead by providing its preliminary guidance for 2024. CEO Rick Muncrief commented: "Looking ahead to 2024, we plan to refine our capital allocation by further concentrating investment in the Delaware Basin. By shifting more capital to the core of this world-class basin and high-grading activity across our diversified portfolio, we expect to deliver a step-change improvement in capital efficiency, and we are well positioned to generate growth in free cash flow that can once again be harvested for shareholders."
The core of Devon's plan is to shift more of its capital spending to the low-cost Delaware Basin section of the Permian. Devon intends to allocate 60% of its capital budget toward developing its Delaware Basin acreage. It will free up capital by cutting spending in the Williston Basin by 50% and reducing appraisal drilling in the Eagle Ford.
This plan should enable Devon to produce more free cash flow in 2024:
Image source: Devon Energy.
As that slide shows, Devon sees its capital spending declining by 10% next year, driven by service cost deflation and a shift toward higher-return drilling in the Delaware Basin. That investment level will keep its full-year total production roughly flat with its 2023 exit rate. Meanwhile, it will boost its free cash flow by about 20%, assuming oil prices average around $80 a barrel (slightly above the recent oil price).
That will give Devon more money to return to shareholders. The company plans to send them 70% of its free cash flow next year through its base dividend, variable dividends, and share repurchases. It intends to increase its fixed base dividend payment while returning additional cash through variable dividends and repurchases.
Meanwhile, there's upside to that plan if oil prices average more than $80 a barrel or the company completes a needle-moving acquisition. Higher cash flow would give Devon more money to return to its investors via the variable dividend.
The dividend could be a lot higher in 2024
Devon Energy recently gave its investors a big raise as higher oil prices enabled it to generate a lot more free cash flow in the third quarter. The company could pay an even higher dividend next year, fueled by its plan to shift capital spending to its highest return region to generate more cash. That makes Devon an intriguing option for investors seeking a high-yielding payout with high upside potential.
