This Top Oil Stock Continues to Send Investors More Cash
Devon Energy (NYSE: DVN) has transformed into a low-cost oil producer over the years. It has jettisoned high-cost operations and recycled that capital to grow its higher-returning assets.
This strategy continues to pay big dividends for shareholders. Devon is generating lots of cash and returning much of it to its investors.
The oil company's cash-generating capabilities were on full display during the second quarter. With further improvements ahead, the company continues sending more cash to its shareholders.
Drilling down into Devon Energy's second-quarter results
Devon Energy delivered record oil production in the second quarter. Its output averaged 335,000 barrels per day, exceeding its guidance by 3%. Meanwhile, its total production averaged 707,000 barrels of oil equivalent per day (BOE/d), 7% above the year-ago period.
Fueling that production gusher was excellent well productivity in the Delaware Basin. Output in that region has risen 5% over the past year to 461,000 BOE/d.
The company's focus on growing its high-margin oil output is helping fuel strong cash-flow production. Devon produced $1.5 billion of operating cash flow in the quarter, a 9% increase from the year-ago period. The oil company also benefited from higher pricing (it realized $44.29 per BOE, compared to $42 per BOE in the second quarter of last year) and its continued efforts to contain costs.
Devon invested $890 million into maintaining and growing its oil output and spent $81 million on acquisitions. Even with all that investment spending, the company produced $587 million of free cash flow during the period.
Sending more cash to shareholders
Devon used some of its free cash flow to strengthen its already solid balance sheet. It grew its cash balance to $1.2 billion, putting its net leverage ratio at around 0.6 times after factoring in its $6.1 billion of debt.
Because it has a strong, cash-rich balance sheet, Devon was able to continue returning more cash to shareholders. The oil company paid its regular quarterly dividend of $0.22 per share.
In addition, it made a variable dividend payment of $0.22 per share, pushing the quarterly total to $0.44 per share. At that payment rate, Devon Energy has an implied annualized forward dividend yield of 4% at its recent share price of $44.
Devon Energy returned an additional $256 million to shareholders by repurchasing 5.2 million shares during the quarter. It has now repurchased 54.7 million shares for $2.7 billion since it initiated its current share-repurchase authorization in late 2021.
More cash is coming
Devon took a notable step toward enhancing its ability to produce cash in the second quarter. The company agreed to buy Grayson Mill Energy for $5 billion, consisting of $3.25 billion of cash and $1.75 billion of stock.
The deal will be immediately accretive to its cash flow and free cash flow per share. It will significantly enhance the company's position in the Willison Basin, where it expects to deliver peer-leading margins.
The accretive nature of that transaction is giving Devon Energy the confidence to significantly increase its share-repurchase authorization. The company is boosting its plan by 67% to $5 billion through the middle of 2026. Devon also believes that the deal will be accretive to its dividend payment in 2025 and beyond.
The company also plans to retain up to 30% of its annual free cash flow to strengthen its balance sheet, aiming to repay $2.5 billion of debt over the next two years. That debt repayment will help reduce its leverage ratio, which it expects will rise to around 1x after closing the deal.
The fuel to grow shareholder value
Devon Energy continues to generate lots of cash, much of which it returns to shareholders. The company aims to continue growing its cash flow per share by expanding its high-margin oil production while also reducing its outstanding shares. Add its growing cash flow to its dividend income, and Devon could produce high-octane total returns in the coming years, making it a compelling oil stock to consider buying for the long haul.
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
