Devon Energy (DVN) is an attractive energy stock, but it is only suitable for a specific type of investor.
In short, for investors who are bullish on oil and gas in the long term, Devon Energy is an excellent stock. The company’s recent performance shows good operational progress, especially with the integration of the Grayson Mill acquisition. In the fourth fiscal quarter, the company’s total oil and gas production reached 848,000 barrels of oil equivalent per day (BOE/D), surpassing the previous estimate of 811,000 to 830,000 BOE/D.
This impressive result has led management to raise their 2025 forecast by 2% to a new range of 805,000 to 825,000 BOE/D. Management estimates that if oil prices are at $70 per barrel, this will generate over $3 billion in free cash flow (FCF). Given the company’s market capitalization of approximately $24.4 billion, this implies an FCF yield of 12.3% of the company’s market value.
The valuation is attractive, and management has successfully integrated acquisitions and improved operational efficiency. For investors focused on energy, there is much to like about this stock.
What about Devon Energy’s dividend? The company’s capital allocation plan calls for using 30% of FCF to strengthen the balance sheet, with the remaining 70% returned to investors through stock buybacks and dividends. However, the variable dividend component disappeared in the third fiscal quarter of 2024, with management’s press release mentioning “creating value for shareholders through a sustainable, annually increasing fixed dividend.”
The fixed dividend has increased, but if Devon Energy does not pay a variable dividend in 2025, its dividend yield will only be 2.6% (based on the current price). If dividend income is crucial to you, then Devon Energy may not be the right stock for you.
Overall, it is highly likely that Devon Energy will focus on debt repayment and stock buybacks in 2025 rather than variable dividends. The company will reduce the number of shares, thereby decreasing future interest expenses. This means that, all else being equal, future investors will see increased cash flow per share and a better opportunity for cash returns.
