With oil companies reporting massive profits after the recent spike in energy prices, many have been turning their attention to oil and gas stocks. While oil supermajors may be one of the most common considerations, there's no shortage of names in the oil patch for investors to consider.
One name, for example, that draws consistent attention is Devon Energy (DVN -1.93%), a company with upstream operations that currently offers a mouthwatering forward dividend yield of 7.6%. Despite its popularity, though, smart investors will want to familiarize themselves better with the company, so let's look at some things that provide some insight into this leading energy stock.
1. Mainly focused on the mainland
While Devon Energy has engaged in offshore activities in the past, these days it's singularly focused on terra firma. Besides the Williston Basin, Devon's exploration and production (E&P) operations are located in the Powder River Basin, Anadarko Basin, Delaware Basin, and Eagle Ford, where Devon has recently expanded its operations. In September, Devon closed on the $1.8 billion acquisition of Validus Energy, resulting in Devon's doubling of its presence in the Eagle Ford to 82,000 net acres.
In 2021, Devon Energy reported production of 572,000 barrels of oil equivalent daily (BOED) -- about 2% higher than what it had forecast. Management has a goal of consistently growing annual oil equivalent production by up to 5%. It seems the company is on track to meet that target in 2022. Averaging 602,000 BOED through the first three quarters of 2022, Devon forecasts a fourth-quarter production volume of 620,000 BOED to 640,000 BOED.
2. Distinguishing itself as a trailblazer
Committed to returning capital to shareholders, Devon adopted an innovative approach to its dividend. In 2021, Devon announced a fixed-plus-variable dividend policy -- the first of its type in the industry. With this new strategy, Devon expects to fund its quarterly dividend from two sources: The fixed portion comes from 10% of its quarterly operating cash flow, while management will allot up to 50% of its excess free cash flow for the variable portion of the payout.
Unlike steady dividend payers that consistently hike their distributions, Devon Energy's investors must recognize the volatile nature of the company's strategy. During boom times, investors can expect their passive income to prosper; however, when energy prices plummet, the dividend will likely follow suit. Take the third quarter of 2022, for example, when Devon announced a fixed-plus-variable dividend of $1.35 per share. While it represents a 61% year-over-year increase, it's 13% lower than the $1.55 per share that Devon returned to shareholders in the second quarter of 2022.
3. A robust balance sheet
With a clear dedication to rewarding shareholders, skeptical investors may question whether Devon's desire to please investors with the dividend is jeopardizing the company's financial health. It's a valid concern. Devon's dividend yield has topped 8% during 2022 -- something that certainly warrants investigation.
DVN Dividend Yield data by YCharts.
Investors, however, can rest assured that the company's financial well-being remains intact. For example, Devon maintains an investment-grade balance sheet, including ratings of BBB+, Baa2, and BBB from Fitch Ratings, Moody's, and Standard & Poor's, respectively.
Another encouraging sign is the company's conservative approach to leverage. As of Sept. 30, 2022, Devon had a net debt-to-earnings before interest, taxes, depreciation, amortization, and exploration (EBITDAX) expense of 0.6. This is expected to fall in the coming months, with management forecasting a net debt-to-EBITDAX ratio of 0.5 by the end of 2022. And this may fall even further. In the company's Q3 2022 earnings report, management said it had identified opportunities to reduce $1 billion in debt.
4. Wall Street believes the stock has room to run
For investors on Main Street, performing their own due diligence in advance of buying a stock is essential. Nonetheless, taking note of what Wall Street thinks about an equity is also worthwhile, providing another data point for investors to consider. With regard to Devon Energy, analysts seem bullish on the stock's prospects.
This week, Raymond James hiked its price target on Devon's stock to $87 from $83, and Argus Research lifted its price target to $90 from $77. With shares trading around $71 as of this writing, Raymond James and Argus Research have price targets that imply an upside of about 23% and 27%, respectively.
5. Shares are hanging on the discount rack
Investors who recognize that Devon Energy is an alluring way to energize their passive income stream won't have to dig deep into their pockets to pick up shares. While Devon's stock is currently trading at about 5.7 times operational cash flow -- the same multiple as its five-year average -- it seems attractively valued in terms of forward earnings. Devon's stock currently trades at 7.5 times forward earnings, representing a notable discount to its five-year average multiple of 19.6.
For a variety of investors, Devon Energy should be on the radar
Whether you're a value investor or an income investor, Devon Energy is a stock that warrants attention. Shares are trading at a discount, and the forward dividend yield of 7.6% doesn't warrant a red flag from circumspect investors. Energy prices may have ebbed over the past few months, but that shouldn't preclude investors from considering Devon Energy as a way to grease up the wheels of passive income generation.
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November 20, 2022 at 10:02PM
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5 Things to Know About Devon Energy Stock - The Motley Fool
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