Devon Energy (DVN +1.83%) is having a strong year. The oil company's legacy operations are firing on all cylinders, which was evident in its recent third-quarter earnings report.
However, as good as things have been, the oil company expects them to get even better in the coming quarters. Fueling that view is its recently closed acquisition of Grayson Mill Energy. Here's a look at Devon's latest quarter and what it sees ahead.
NYSE: DVN
Key Data Points
Drilling down into Devon's third-quarter results
Devon Energy produced an average of 335,000 barrels of oil per day during the third quarter, which exceeded its guidance by 4%. Meanwhile, total output averaged 728,000 barrels of oil equivalent per day (BOE/d), which was 3% higher than the prior quarter.
The company got a slight bump from its acquisition of Grayson Mill Energy, which closed in late September and added 5,000 BOE/d to its quarterly total. Meanwhile, the main factor fueling its outperformance was the strength of its Delaware Basin operations, where production grew by 6% quarter over quarter.
The company's robust production helped fuel strong financial results. Devon generated $1.7 billion of cash flow from operations during the period, an 8% increase, compared to the prior quarter. Meanwhile, it produced $786 million of free cash flow after funding capital expenditures.
Devon used its free cash flow to return capital to shareholders and strengthen its balance sheet. The company declared its quarterly dividend of $0.22 per share and completed $295 million of share repurchases. It has now repurchased $3 billion of stock since launching its current buyback program in late 2021, retiring 6.7% of its outstanding shares.
The oil company opted not to declare a variable dividend payment during the third quarter. Instead, it used its remaining excess free cash to strengthen its balance sheet, repaying a $472 million debt maturity.
That helped lessen the balance-sheet impact of the Grayson Mill acquisition, which saw the company issue $3.25 billion of debt to close that deal. Even with that debt issuance, Devon ended the quarter with a low 1.1x leverage ratio.
Priming the pump for growth in 2025 and beyond
"Looking ahead to the remainder of 2024 and into 2025," stated CEO Rick Muncrief in the third-quarter earnings press release, "we enhanced the quality and depth of our asset portfolio with the recent acquisition of Grayson Mill Energy." He further noted:
This transaction marks a major milestone, increasing our operating scale and strengthening our outlook for the fourth quarter and beyond. Coupled with the operational momentum of our legacy business, this acquisition positions Devon to deliver strong returns through the cycle and underscores our commitment to generating long-term value for our shareholders.
The company provided an initial view of what's ahead in 2025. Devon Energy expects its total production to average around 800,000 BOE/d, while its oil output should be about 380,000 barrels per day. The company anticipates investing $4 billion-$4.2 billion to maintain and grow its production, representing less than 65% of its projected cash flow from operations. Meanwhile, it sees its leverage ratio falling below 1x as its earnings grow and it repays additional debt.
Devon's capital allocation strategy will shift toward debt reduction in the near term. Meanwhile, the company will prioritize share repurchases over paying variable dividends, due to the current valuation of its stock. At $70 oil (right around the current price point), Devon trades at a 9% free-cash-flow yield, based on its 2025 outlook. That makes it significantly cheaper than the broader market, which trades at a free-cash-flow yield in the low single digits.
A compelling oil stock investment
Devon Energy was already thriving before it acquired Grayson Mill Energy. That acquisition will help fuel higher production and free cash flow in 2025 and beyond.
Meanwhile, Devon trades at a reasonable valuation, which it's working to capitalize on by repurchasing shares. Add it all up, and Devon looks like an attractive oil stock to buy these days.
