Devon Energy (DVN +0.65%) boosted its crude oil production by 8% in 2023 to a record level for the company. Its high-margin output helped fuel strong free cash flow, and the oil company returned the bulk of that money to shareholders via a gusher of dividends and share repurchases.
Devon doesn't expect to set another production record in 2024, though. Instead, it plans to trim its capital spending, which will impact its production. However, that strategy positions it to produce even more free cash in 2024 if oil prices cooperate, potentially giving it more money to return to investors.
NYSE: DVN
Key Data Points
A record year
On Tuesday, Devon Energy reported its fourth-quarter and full-year results. The oil company produced 662,000 barrels of oil equivalent per day (BOE/d) during the fourth quarter, including 317,000 barrels of oil per day. That exceeded the high end of its guidance range. Meanwhile, total production for the year averaged 658,000 BOE/d (up 8% from 2022), while crude oil output averaged a record-setting 320,000 barrels per day. The oil and natural gas company benefited from two acquisitions that closed in 2022 (Validus Energy and RimRock Oil & Gas), as well as solid organic production growth fueled by its Delaware Basin position.
Devon's record-setting oil output helped it produce $2.7 billion in free cash flow last year. While that was down sharply from the record $6 billion it generated in 2022, it was still a solid result considering that oil and natural gas prices were much lower while capital expenses increased. Devon used that excess cash to pay more than $1.8 billion in dividends (fixed and variable) and repurchase $979 million in stock. The company's total dividend payments gave it a 7% yield relative to its current stock price. Meanwhile, it has repurchased 6% of its outstanding shares since late 2021.
In 2024, efficiency will be the name of the game
Devon Energy doesn't expect 2024 will be another record year for oil output. The company recently reaffirmed its 2024 outlook, which would see production average 650,000 BOE/d, with crude output of about 315,000 barrels per day. That oil production level would be about flat compared to its 2023 exit rate of 317,000 barrels per day. Meanwhile, natural gas production would decline as the company focuses on drilling in higher-margin oil-focused regions.
The company's production will dip this year because it plans to trim its capital spending by about 10% to a range of $3.3 billion to $3.6 billion. Driving that decline is lower service costs and a focus on becoming more efficient.
"Looking ahead to 2024, we have designed a plan to deliver a step-change improvement in capital efficiency," stated CEO Rick Muncrief in the fourth-quarter earnings press release. "By allocating additional capital to the core of the Delaware Basin and high-grading activity across our diversified portfolio, we expect to efficiently sustain our oil production for roughly 10% less capital."
That reduced capital spending positions Devon Energy to produce more free cash flow this year. At $80 a barrel oil (which is just above where West Texas Intermediate crude was trading this week), it could produce $3.2 billion in free cash flow, about 20% more than last year.
Devon plans to return 70% of its free cash flow to shareholders through its base dividend (which it will increase by 10% this year), share repurchases, and variable dividends, while using the rest to further strengthen its balance sheet. While management has prioritized variable dividends in the past (targeting to pay up to 50% of its excess free cash flow in variable dividends), it will shift its focus in 2024 to share repurchases. With shares recently down more than 40% from the 8-year peak they reached in 2022, Devon trades at a dirt-cheap valuation. It trades at a 9% free cash flow yield at $75 a barrel oil, three times higher than the broader market (suggesting it's significantly cheaper). Because of that, it's on pace to retire 9% of its outstanding shares as it deploys what remains of its $3 billion repurchase authorization.
Shifting gears from growing crude production to free cash flow
Devon Energy delivered record oil output last year. However, that production growth didn't create value for investors. That's leading management to shift gears to focus on growing its free cash flow. The company hopes that producing more cash and using it to repurchase its now-cheap stock will help fuel stronger returns in 2024. That potential rebound makes Devon Energy a compelling investment opportunity these days.
