Bull Market and Beyond: You Haven't Missed Out on Devon Energy

While most of the attention in the oil and gas sector focuses on the "oil" bit, there's also a story to tell with gas. It's a consideration that comes to mind when evaluating Devon Energy (DVN -0.09%), not least because gas has been the real swing factor in determining dividend payouts this year for companies like Devon. As such, the oil and gas company might be a bit more diversified than many think.

Here's why Devon Energy is worth picking up for dividend-hunting energy bulls.

Devon Energy's dividend

The focus on Devon's oil business is understandable; after all, the overwhelming majority of its assets and sales come from oil. Moreover, its management guides toward the price of oil as being the key determinant in its capital allocation framework and, ultimately, its dividend.

For example, in its recent third-quarter earnings presentation, the company outlined a range of scenarios for free-cash-flow (FCF) generation based on the price of oil. Based on a share price of about $47, management estimates its FCF yield will be 8% at a price of oil of $70 a barrel, 11% for $80 a barrel, and 14% for $90 a barrel.

FCF matters because companies, including Devon Energy, base their capital allocation plans on it. Indeed, Devon's management intends to return 70% of its FCF to shareholders in 2024, with the remaining 30% earmarked to improve its balance sheet by retiring debt.

Devon Energy currently pays a quarterly base dividend of $0.20 a share and will pay a variable dividend of $0.57 on Dec. 29, making a quarterly dividend of $0.77, which annualizes to a yield of around 6.8%.

So, is it fair to say Devon Energy is a play on the price of oil and its ability to produce oil while growing its reserves? Yes and no.

Image source: Getty Images.

Why Devon Energy is more than just oil

The key to Devon Energy's dividend is its earnings and FCF, which depends on energy production and the price of energy. However, it's not just oil that counts for Devon. This year, the evolution of its variable dividend has primarily been guided by the prices of natural gas liquids and gas.

Putting production matters aside, the critical number in this table is the total equivalent realized price, which incorporates its oil and gas assets. The direction of its movement correlates with the dividend announced in the quarter.

While oil makes up the overwhelming bulk of Devon's revenue (roughly 82% in the third quarter by my calculations), the dramatic movement in the gas prices significantly impacted the total oil equivalent realized price. For example, in last year's third quarter, natural gas liquids and gas contributed roughly 29% of revenue, but they only contributed around 18% in the third quarter.

Data source: Devon Energy. *Dividend relates to that announced in the quarter, so $0.77 was announced in the third quarter to be paid in the fourth quarter. Bbl = barrel. Mcf = thousand cubic feet. Boe = barrels of oil equivalent. YOY = year over year.

What does it mean for investors?

Devon Energy is still a stock for oil bulls or those willing to take an agnostic position -- not a bad approach, as it's tough to predict where energy prices are headed. However, the decline in its dividend this year (until the hike in the recent quarter) is arguably more of a function of movement in gas prices rather than the price of oil.

Henry Hub Natural Gas Spot Price data by YCharts

As such, it's entirely possible, if the recent stability in the price of gas (see chart above) carries on and the price of oil is stable, that Devon might be able to continue its dividend at the current rate. It's time to think of Devon Energy as a stock for energy bulls rather than just oil bulls, and it's not too late to buy into that theme.