We’re looking to the company for answers on how it plans to continue returning cash to shareholders in a lower oil-price environment.
Oil-and-gas producer Devon Energy (DVN) on Tuesday delivered lackluster fourth-quarter earnings, sending shares lower. And now we’re looking to the company for answers on how it plans to continue returning cash to shareholders in a lower oil-price environment. Total revenue was roughly flat year-on-year, at $4.3 billion, slightly missing analysts’ forecasts of $4.39 billion, according to estimates compiled by Refinitiv. Adjusted diluted earnings-per-share (EPS) advanced 20% compared with the year prior, to $1.66 a share, falling short of expectations for EPS of $1.75, Refinitiv data showed. Note : Devon Energy is scheduled to host its post-earnings conference call on Wednesday at 11:00 a.m. ET. Bottom line This was a disappointing quarter for Devon Energy, despite having managed our expectations given the recent decline in energy prices. The combination of both lower-than-expected production and realized prices resulted in poor cash flow performance in the fourth quarter — and that, in turn, meant the declared fixed-plus-variable dividend distribution to shareholders came in below Wall Street’s forecasts. Compounding the suboptimal results, the company on Tuesday guided for production to be below expectations for both the first quarter and full year 2023, while forecasting capital expenditures to be higher than expected. As a result, Devon stock tumbled roughly 5.5% in afterhours trading, as shares re-rated to the lower cash-return profile. Devon was also squeezed by weaker oil prices, with West Texas Intermediate crude — the U.S. oil benchmark — having fallen more than 9% over the past three months, to around $78 a barrel. Nonetheless, the geo-economic backdrop should ultimately support energy prices this year — including China’s economic reopening, the expected replenishment of the U.S. Strategic Petroleum Reserve and Russia’s ongoing war in Ukraine — and could drive Devon’s shares higher. Cash flow generation and capital returns would likely also rebound in response to rising prices. On Wednesday, we’ll be looking to hear from management on how they intend to improve operating efficiencies to continue supporting shareholder cash returns. In the meantime, our 1 rating on the stock and price target of $82 a share are under review. Capital allocation We pay close attention to cash flow metrics when it comes to our energy exploration-and-production holdings. That’s because the core of our investment thesis for these holdings is that their capital discipline, combined with a favorable commodity price environment, will lead to significant cash flow generation — a large percentage of which should then be returned to shareholders via dividends and buybacks. After accounting for the fixed portion of the dividend, management generally distributes up to 50% of excess free cash flow to shareholders via the variable portion of the dividend. Despite an 11% increase to the fixed portion of Devon’s quarterly dividend for 2023, to 20 cents per share, the company was only able to declare an 89-cents-per-share fixed-plus-variable dividend. That’s down from $1.35 a share in the third quarter of 2022 and $1.55 per share in the second quarter. Though we aren’t surprised to see the distribution come down, the free cash flow performance is disappointing as it points the likelihood of a lower variable portion in the future. And given that the primary reason to own oil stocks is for the return of capital, investors will likely attempt to calculate Devon’s future fixed-plus-variable distributions. Then, they’ll use those estimates as a means of generating a price target based on the yield they expect from the stock. By annualizing the 89-cent-per-share payout, we reach $3.56 per share. At the roughly $64 a share the stock was trading at prior to the earnings release, that amounts to a 5.6% dividend yield — well below the higher yields to which most energy investors have become accustomed. But that’s why the stock moved lower in evening trading, to around $60.50 a share, allowing for a higher yield. If the geo-economic situation ultimately provides a floor for energy prices this year, with potential upside, buyers of Devon could stand to lock in a yield of at least 6%. As was the case in the prior quarter, Devon did not aggressively make use of its $2 billion share repurchase program in the fourth quarter. The company bought back roughly $57 million worth of shares, putting its year-to-date total at $1.3 billion. Management also reiterated that they remain on track to retire about 5% of outstanding shares by the completion of the repurchase authorization. Thanks to continued financial discipline, Devon ended the year with a net debt-to-EBITDAX (earnings before interest, tax, depreciation, amortization, and exploration expense) ratio of 0.5-times (on a trailing 12-months basis), down from 0.8-times at the end of 2021 and inline with prior guidance. (Jim Cramer’s Charitable Trust is long DVN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Devon Energy’s Jackfish Projects processing plant in Alberta, Canada.
Jimmy Jeong | Bloomberg | Getty Images
Oil-and-gas producer Devon Energy (DVN) on Tuesday delivered lackluster fourth-quarter earnings, sending shares lower. And now we’re looking to the company for answers on how it plans to continue returning cash to shareholders in a lower oil-price environment.
