by Oil and gas producer Devon Energy (DVN) posted mediocre fourth-quarter results on Tuesday, sending shares lower. And now we’re looking for answers from the company on how it plans to continue to return cash to shareholders in a lower oil price environment. Total revenue was broadly flat year-over-year at $4.3 billion, slightly below analyst forecasts of $4.39 billion, according to estimates compiled by Refinitiv. Adjusted diluted earnings per share (EPS) rose 20% year-over-year to $1.66 per share, missing expectations for earnings per share of $1.75, Refinitiv data showed. Note: Devon Energy is scheduled to hold its post-earnings conference call on Wednesday at 11:00 am ET. Outcome This was a disappointing quarter for Devon Energy, although we managed our expectations given the recent decline in energy prices. The combination of lower-than-expected production and realized prices resulted in cash flow underperformance in the fourth quarter – and this, in turn, meant that the declared distribution of fixed plus variable dividends to shareholders fell short of Wall Street forecasts. . Compounding the less-than-optimal results, the company advised on Tuesday that production will fall short of expectations for both the first quarter and full-year 2023, while forecasting capital spending to be higher than expected. As a result, Devon shares were down around 5.5% in after-hours trading as the shares were downgraded to the lower cash return profile. Devon was also weighed down by weaker oil prices, with West Texas Intermediate crude – the benchmark for US crude – falling more than 9% over the past three months to around $78 a barrel. However, the geoeconomic backdrop should support energy prices this year – including China’s economic reopening, the expected replenishment of the US Strategic Petroleum Reserve and Russia’s ongoing war in Ukraine – and could lead Devon shares to move up. Cash flow generation and capital returns would likely also recover in response to rising prices. On Wednesday, we will look to hear from management on how they intend to improve operational efficiency to continue supporting shareholder cash returns. Meanwhile, our No. 1 rating on the stock and price target of $82 per share are under review. Capital Allocation We pay close attention to cash flow metrics when it comes to our energy exploration and production interests. 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 must be returned to shareholders by through dividends and buybacks. After accounting for the fixed portion of the dividend, management typically distributes up to 50% of excess free cash flow to shareholders through the variable portion of the dividend. Despite an 11% increase in the fixed portion of Devon’s quarterly dividend for 2023 to 20 cents a share, the company was only able to declare a fixed plus variable dividend of 89 cents a share. That’s down from $1.35 per share in Q3 2022 and $1.55 per share in Q2. While we are not surprised to see the distribution decline, the free cash flow performance is disappointing as it points to the likelihood of a lower variable tranche in the future. And given that the main reason for owning oil stocks is the return on capital, investors will likely try to calculate Devon’s more variable fixed future distributions. They will then use these estimates as a means of generating a price target based on the yield they expect from the stock. By annualizing the payout of 89 cents per share, we arrive at $3.56 per share. At around $64 a share, the stock was trading ahead of the earnings release, which equates to a dividend yield of 5.6% – well below the higher yields most energy investors have become accustomed to. . But that’s why the stock dropped in overnight trading to around $60.50 a share, allowing for a higher yield. If the geo-economic situation finally provides a floor for energy prices this year, with upside potential, Devon buyers could earn at least a 6% yield. As in the previous quarter, Devon did not make aggressive use of its fourth-quarter $2 billion share buyback program. The company repurchased about $57 million worth of stock, totaling $1.3 billion for the year. Management also reiterated that it remains on track to retire approximately 5% of the outstanding shares until the completion of the repurchase authorization. Thanks to continued financial discipline, Devon ended the year with a net debt/EBITDAX ratio (earnings before interest, taxes, depreciation, amortization and operating expenses) of 0.5 times (over the last 12 months), down from 0. 8 times at the end of 2021 and in line with previous guidance. (Jim Cramer’s Charitable Trust is long DVN. See a complete list of shares here.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll 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 charity fund’s portfolio. If Jim talks about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. 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Devon Energy’s Jackfish Projects processing plant in Alberta, Canada.
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Oil and gas producer devon energy (DVN) posted mediocre fourth-quarter results on Tuesday, sending stocks lower. And now we’re looking for answers from the company on how it plans to continue to return cash to shareholders in a lower oil price environment.
