An analyst at Mizuho recently welcomed Devon Energy's (DVN 0.77%) first-quarter earnings report by raising the stock's price target from $53 to $57 and maintaining a "buy" rating. Here's why the outlook appears positive for this oil and gas producer.
Devon Energy's improvements
The bulk of Devon's production comes from the Delaware Basin in southeast New Mexico and west Texas. Management's decision to focus investment there appears to be paying off, as first-quarter production came in better than expected. The plan is to invest in improving well productivity in its highest-quality assets, and the good news is Devon achieved "better-than-planned well productivity, cycle time improvements that brought forward activity and the easing of infrastructure constraints in the Delaware Basin," according to the earnings release.
First-quarter production averaged 664 thousand barrels of oil equivalent per day (MBoe/d) compared to guidance for 630 MBoe/d to 650 MBoe/d.
In addition, management raised its full-year production guidance to 655 MBoe/d to 675 MBoe/d, compared to a previous estimate of 640 MBoe/d to 660 MBoe/d.
Right move, right time for Devon Energy
Devon is increasing production at the right time, as the price of oil has stayed relatively high through 2024, enabling the company to generate $623 million in adjusted free cash flow in the first quarter. Management has a policy of distributing 70% of its adjusted FCF to shareholders, meaning a payout of roughly $430 million this quarter. Of that amount, $142 million went toward a fixed dividend payment of $0.22 per share. Most of the rest went to share repurchases ($205 million), with only $82 million allocated toward a variable dividend of $0.13 per share.
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That may disappoint some income-seeking investors, but it shouldn't. After all, Devon is improving the productivity of its assets while reducing its share count, therefore increasing existing shareholders' claim to an improving asset base. That's a significant plus, and if the price of oil stays relatively high, investors can expect plenty of dividend growth in the future.
