Devon Energy (NYSE: DVN) has transformed into a producer of cheap oil over the yearsIt has jettisoned expensive operations and reused that capital to grow its assets at higher returns.
This strategy continues to pay big dividends for shareholders. Devon generates a lot of cash and returns a large portion of it to its investors.
The oil company cash-generating capabilities were fully demonstrated during the second quarter. With further improvements on the horizon, the company continues to send more cash to its shareholders.
A Deeper Look at Devon Energy’s Second Quarter Results
Devon Energy delivered record oil production in the second quarter, with output averaging 335,000 barrels per dayexceeding guidance by 3%. Meanwhile, total production averaged 707,000 barrels of oil equivalent per day (BOE/d), 7% above the year-ago period.
Fueling that wave of production was excellent Good productivity in the Delaware Basin. Output in that region increased 5% last year to 461,000 BOE/d.
The company’s focus on growing its high-margin oil production is helping to drive strong cash flow production. Devon produced $1.5 billion by operating cash flow in the quarter, up 9% from the same period last year. The oil company also benefited from higher prices (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 in maintaining and growing its oil production and spent $81 million on acquisitions. Even with all that capital expenditure, the company produced $587 million in free cash flow during the period.
Send more money to shareholders
Devon used some of its free cash flow to fund its already solid balance sheet. It grew its cash balance to $1.2 billion, increasing its net leverage ratio by about 0.6 times after accounting for the $6.1 billion by debt.
Because it has a strong, cash-rich balance sheet, Devon has been able to continue to return more money 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, bringing the quarterly total to $0.44 per share. At that payment rate, Devon Energy has an implied annual dividend future dividend yield of 4% at the recent share price of $44.
Devon Energy returned another $256 million to shareholders by buying back 5.2 million shares during the quarter. now has repurchased 54.7 million shares for $2.7 billion since the current share repurchase authorization at the end of 2021.
More money is coming
Devon took a notable step toward improving its cash generation capabilities in the second quarter. The company agreed to acquire Grayson Mill Energy for $5 billion, consisting of $3.25 billion in cash and $1.75 billion in stock.
The deal will be immediately accretive to cash flow and free cash flow per share and will significantly strengthen the company’s position in the Willison Basin, where it expects to deliver industry-leading margins.
The positive nature of that transaction gives Devon Energy confidence to significantly increase its authority to buy back its own sharesThe company is raising its plan by 67% to $5 billion through mid-2026. Devon also believes the deal will be accretive to dividend payments in 2025 and beyond.
The company also plans to retain up to 30% of its annual free cash flow to strengthen its balance sheet, with a goal of paying down $2.5 billion in debt over the next two years. That debt paydown will help lower its leverage ratio, which it expects to rise to around 1x after the deal closes.
The fuel to grow shareholder value
Devon Energy continues to generate a lot of cash, much of which it returns to shareholders. The company aims to continue to grow its cash flow per share by expanding its high-margin oil production, while Also by reducing its outstanding shares. Add its growing cash flow to its dividend income and Devon could deliver high total returns in the years to come, making it an attractive oil stock to consider buying over the long term.
Should You Invest $1,000 In Devon Energy Now?
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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.
This Top Oil Stock Keeps Making Investors More Money was originally published by The Motley Fool
